Is China another real estate bubble?

NEW YORK (CNNMoney.com) -- It may be the world's last real estate bubble, one that is still inflating rapidly. And its end could become the "pop" heard 'round the world.

A growing number of economists are worried that a bubble in Chinese real estate has the potential to rattle the world economy that is still struggling to recover from the shock of 2008's global meltdown.

Soaring real estate prices in China's coastal cities, with prices rising as much as 50% a year, have lifted some rents to levels comparable to Manhattan and driven a building boom of luxury apartments and office space many fear far outstrips demand.

"China is clearly in an asset bubble. It's almost like it didn't learn its lesson," said Nariman Behravesh, chief economist for IHS Global Insight.

That rapid growth in real estate has led to 10% annual economic growth in China. Among the world's major economies, China is alone in surging at a blistering pace -- a nearly 12% growth rate in the first quarter of 2010. And when the bubble bursts, naysayers warn, the results could be felt far outside China's borders.

Developed economies like Germany, Japan and the United States have become more dependent on China's consumer spending and growing middle class. If that growth is wiped out by a bubble bursting there, a major driver in global economic growth will vanish.

"There are so many economies that are benefiting from rapid growth of exports to China," said China expert John Makin, a visiting scholar at the American Enterprise Institute. "If that were to suddenly slow, that's a big impact. If they handle it badly, it has the potential to even risk a global double dip recession. I don't think that will happen, but China's record in the area is not great."

Those worried about the bubble say if China's real estate boom disappears, so will the economic growth that the world has been counting on.

"The problem is the housing they're building is not the housing they need. They're building luxury high rises the masses can't afford," said short seller Jim Chanos, the head of Kynikos Associates hedge fund and one of the most prominent bears about the future of the Chinese economy. "When it pops, there's clearly going to be knock-on effects we can't see right now."

While China's government limits foreign banks from doing business there, a lack of transparency in the Chinese banking system has led to plenty of debate about the extent to which foreign banks are invested there.

"I think the limits on their market access are actually helpful in this case, but [big western banks] will find ways around them," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. "Our banks, when they get into trouble, will have to be bailed out again, and that'll be enormously costly."

While there's a growing consensus that there is a real estate bubble in China, not all are worried about ripple effects. Some economists like Behravesh believe that the impact on the United States and Europe will be relatively minimal.

Chanos believes that countries with economies heavily dependent on exporting commodities to China, like Australia and Brazil, are far more at risk than the developed economies in North America and Europe.

There are economists who aren't worried about a bubble in Chinese real estate. They argue that China's central government is better positioned to deflate a bubble than were the western economies that ignored signs of real estate bubbles in their own countries.

"You can obviously find some parts of China that frothed up at the end of last year into this year," said Anthony Michael, head of Asian fixed income for Aberdeen Asset Management. "But the Chinese government knows this. They're not sitting around doing nothing. They're already telling banks not to lend in cities that are involved in excess development."

Michael also argues that the Chinese real estate boom has taken place with only a fraction of the level of borrowing that occurred in the United States and other western economies, where buyers were borrowing 100% or more of the property's value.

But Chanos and other critics counter that the level of borrowing fueling the Chinese real estate market is far greater than is widely reported. And he says China's real estate bubble could not have grown without the approval of China's government, and that a command economy like China is actually more susceptible to bubbles than a market economy.

"The Soviet Union grew well above U.S. growth rates for 20 to 30 years after World War II," said Chanos. "It was a phony growth, capital projects that proved to be very inefficient."