China is the great contradiction. For one of the few remaining socialist countries, huge disparities of wealth exist between the elite upper class, and the poorer, uneducated rural areas. It’s a giant economy, which could turn out to be the greatest ever economic bubble, with widespread inflation, coupled with growing unemployment and animosity of the populace. Legendary short seller Jim Chanos last year described China as being on a “treadmill to hell”. But this correspondent has observed even worse — China could well be on the path to a giant collapse, and may well drag Australia, and the rest of the world down with it.

The most noticeable thing about China is its size. The capital, Beijing, is littered with what appears to be thousands of residential buildings, which appear much like Australian housing commission blocks. Most likely due to its continued US dollar peg, which leads to expensive imports (and allows China to maintain export strength), foreign items are extraordinarily expensive. A bottle of Evian water costs upwards of $10, a meal at a moderately upmarket restaurant would fetch $US300, more than a comparable banquet in expensive cities such as London or Sydney. The costs is even greater in a relative sense — according to the IMF, GDP per person in China last year was a mere $US4382 — compared with $US55,590 in Australia or $US36,120 in Britain.

The area of Beijing in which I lived was home to two Burberry shops, along with a collection of the finest global brands, including Cartier, Louis Vuitton, Aston Martin, Bentleigh, Mercedes, Gucci and many more. These were all literally within a couple of blocks. Like most developing counties, the prices tags on these luxury items exceeded the cost in equivalent Western shops.

At the same time, some things remain far cheaper than in Western countries. Beijing’s subway system, further developed for the 2008 Olympics, is so superior to Australia’s appalling public transport infrastructure it unfair to compare them, costs a mere 33 cents per journey. You can travel for an hour in a taxi for little more than $20.

Inflation, however, remains rampant. State-produced statistics put recent inflation figures at 6.2% for August. Of course, few place any real credibility on China’s state-produced statistics, which perform largely propaganda-based functions. Locals told me that the past 10 years had seen enormous increases in prices, with the Beijing Olympics causing the traditional problems for residents, leaving a legacy of inflated prices and empty stadia. Unemployment had also become a large problem, with many, including elite university graduates, remaining unable to find work.

The greatest effect of China’s extraordinary monetary growth has been felt in housing prices. For many Chinese, the choice between leaving money in a bank (and generating a real return of negative 5%) and speculating in property, often leads to the latter occurring.

But while China has embraced many of the ugly elements of capitalism, it still retains many socialist flaws. The number of government workers doing what appears to be nothing productive is extraordinary. Almost comically, tourist attractions provide a multiticket to enter various parts of a site. Every attendee purchases a ticket with multiple sections, as you walk through different areas, several attendants clip the ticket in other places. The point of this other than providing a completely unnecessary job, remains a mystery.

These aren’t China’s only problems. As Greg Canavan last week noted in The Daily Reckoning, China may soon be facing an entirely different problem. It has lent money to the wrong person. Canavan stated that the:

“[Chinese] Government is using its citizens’ savings to lend to the largest bankrupt nation in the world. That’s not too smart. Of course, China is doing so for its own strategic purposes. It lends to the US so it can keep its currency competitive.”

But by doing so it robs its household sector of purchasing power. It keeps import prices expensive and denies the country’s savers the ability to purchase foreign goods at a more favourable price.

Holding hundreds of billions of dollars worth of US debt is not a position many would end, but it is the predicament that China now faces. That’s what happens when central planners control and economy. (Other countries that have built up large levels of foreign reserves were the US shortly before the 1930s Depression and Japan before its economy imploded in the 1990s).

The West, while reliant on China’s growth, appears ignorant to the growing problems within the world’s most populated nation. The widespread lending by local governments to fund property speculation has created what appears to gigantic property bubble. This has spurred exports in countries such as Australia and Brazil, but is built on a misguided government policy to promote growth at all costs.

The greater the bubble, the greater the collapse. If that theory holds, watch out.