The global economy may be showing some signs of finally starting to normalize, but investors remain on edge, on the lookout for the slightest hint of trouble. A plunge in U.S. consumer confidence data -- which is often of questionable quality due to the polls' small sample sizes -- was the latest spark for a sell off. Unusually high unemployment claims later this week may also rattle markets if investors forget to take the recent bout of horrible weather into account. And Greece, which accounts for a mere 2% of the eurozone's GDP, seems to be having every detail of its debt load scrutinized in microscopic detail.But when it comes to a much bigger potential source of anxiety -- the debt-fueled, runaway growth in China -- startlingly little is known. China is on pace to overtake Japan as the world's second-largest economy this year, and its return to GDP expansion rates north of 10% is a key driver in the fragile global recovery now under way. But a furious debate rages about whether the blistering expansion is sustainable or merely the prelude to a major meltdown. The lack of reliable government statistics, meanwhile, renders the country a black box, forcing investors to rely on anecdotal evidence instead.

And the tales of excess coming out of the country have been anything but reassuring lately. As a Chinese real estate bubble rages -- caused in large part by the unprecedented stimulus Beijing extended through bank loans in the midst of the global downturn -- even some China bulls have been shocked to see companies allocate funds meant for soybean processing to property speculation, for example. Bridges that survived not only major earthquakes but also attempts by dynamite crews to take them down and were seen as perfectly fine have been rebuilt as part of the make-work frenzy. Gleaming cities containing high schools with indoor swimming pools and state-of-the-art apartment complexes remain virtually barren.

The lack of credible government statistics is adding more fuel to the fire. By tabulating local government and ratings agency documents, Northwestern University academic Victor Shih found that mainland local government debts now total about $1.7 trillion – more than double the official estimate and about a third of GDP. Banks have pledged another $1.9 trillion in loans to local governments by 2011, Shih told The Financial Times. Much of that funding is expected to be poorly invested, and some local governments are likely to have difficulty paying it back.

In the absence of reliable data, some investors betting that the bubble is on the cusp of bursting have taken to circulating photos of commercial real estate buildings thought to have 50% vacancy rates.

"Nobody Is Calling In the Loans"


But as the roster of those predicting a Chinese meltdown expands -- prominent Harvard University economist Kenneth Rogoff recently became the latest to jump on that bandwagon -- some China experts say more context is desperately needed. The traditional economic models used to diagnose China's impending bubble-burst are poorly designed to evaluate that economy, and critics overlook how many levers the country has to avert potential crises, Zachary Karabell, president of River Twice Research and a noted scholar on the Chinese economy, tells DailyFinance in an interview.

"Nobody is calling in the loans, and there is not leverage in the typical way we would think about these things," Karabell says. Karabell doesn't deny that property valuations are heady. But with a largely closed economy and a limited amount of assets for Chinese citizens to speculate on -- Chinese real estate or stocks being the major contenders -- inflated property prices are hardly surprising.

Moreover, with $2 trillion in reserves, China has the financial firepower to clean up the mess created by loans gone bad. "They can recapitalize their banks many times over," Karabell says. And while alarms about overcapacity in the economy abound, continued strong growth may well enable the country to expand into the substantial infrastructure it has built.

Will the Yuan Float Higher Again?


All eyes are now on the policy measures Beijing is taking to remedy the situation. Bids to curb the lavish level of bank lending that prevailed during the crisis, for example, rocked world markets recently.

A further step China's central government might take in the process of returning to normal would be letting the yuan appreciate in value. Starting in 2005, China had let the currency rise slowly against the dollar. It had risen 20% before the government abruptly reversed course when the economic crisis struck in 2008. A recent expansion in the flexibility of its tether to the dollar has further fueled speculation that an appreciation could be in the cards.

Foreign trading partners have long pushed China to let the yuan rise because they see the undervalued currency giving the country an unfair advantage by making its exports cheaper. But as China scrambles to put the brakes on a too-rapid expansion, a stronger yuan may be in its own interest this time as well.

"It is very much in their long-term policy interest to let it appreciate," says Karabell. "But they will not do it to cave to American dictates any more than we won't meet with the Dalai Lama because they tell us not to."

And though China's focus has been on managing its image both domestically and abroad, providing investors with credible, confidence-building data will ultimately be in its best interest, too.

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