Forbes Columnist Gordon Chang Explains Why China Has It Wrong

Gordon Chang, Forbes.com columnist and author of The Coming Collapse of China, appeared on CNBC's Squawk Box to talk about his bleak views on China's economy, and some of the fundamental issues he sees in their economical strategy.

He said that in April, the HSBC (NYSE: HBC) purchasing managers index and the official PMI out of China were very close to each other. Then in May, the indexes went their separate ways. The Chinese PMI went up, while the HSBC PMI tumbled, he said. According to Chang, most analysts expected the official PMI index to fall just as the HSBC's did, but instead, it went up. He noted that even China's stock market investors thought that the PMI was going down.

"I think that Beijing is starting to fib, because as the economy gets worse, China's numbers get better," said Chang.

Chang continued to say that he thinks they're seeing a Chinese economy of between two percent and three percent growth. Many were concerned that being between the reported seven percent and eight percent was a massive slowdown for China, as they just reported a 7.7 percent growth for their first quarter.

Electricity is by far the most reliable indicator of Chinese economic activity, and it only grew 2.9 percent in the first quarter, Chang said.

"When you consider that the growth of GDP is historically 85 percent of the growth of electricity, you're talking 2.5 [percent]," said Chang.

"But when you strip out economically useless production. All these ghost cities for instance, and high-speed rails to nowhere, you're talking maybe zero [percent]."

He said that in 2008 and 2009, China dumped an incredible amount of stimulus into their economy, maybe as high as $1.4 trillion into a then $4.3 trillion economy. Chang said that growth was created, but so were assets bubbles, and the one that has not resolved itself is housing.

"You see all these contraction cranes in Shanghai and elsewhere, but there's no market for it really, because right now, it takes the average Chinese worker more than 40 years to buy an apartment of 1,100 square feet," said Chang.

"And that's if he doesn't eat or do anything else. So, clearly, you've got an unsustainable bubble."

When China saw these problems manifest themselves in the middle of 2011, they followed by investing more stimulus into their economy during 2012, Chang said. He went on to say that the stimulus is now ineffective, even though there was a fourth quarter bump in 2012.

"Yeah, the Chinese can put stimulus in, but eventually it doesn't work, and the same thing is going to happen in the United States as well," said Chang.

He said that you don't get a soft landing with a strategy like this, as we see with China and their debt crisis. The inevitable buildup of this much stimulus is that the economy is going to take a hit and in China's case, Chang said it'll be soon.

"There's no way they can manage that, and I think we're going to get a big lesson in China," said Chang.