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Jim Chanos, founder of hedge fund Kynikos Associates and well known for being one of the first to uncover the Enron scandal, thinks China will be the most important story of 2011 (I fully agree).  Chanos believes the boom in China is largely driven by building and that this boom in real estate is leading to a bubble environment. The government’s management of this environment could very well decide the direction of the global economy in 2011.

A more interesting part of the discussion is the portion on state run capitalism and whether China is succeeding in its neo-mercantilism. Chanos says Adam Smith will ultimately prevail as the state misallocates funds and malinvestment rises. I think Chanos is exactly right. It’s clear from Chanos’s comments that this is already occurring in many parts of China. The big question is whether it all unravels in spectacular fashion or if they can control this excess capacity without it leading to a global recession?

Source: CNBC

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