MALINVESTMENT STRIKES AGAIN? China’s Looming Real-Estate Bubble: A massive Keynesian spending program has misallocated capital and set the stage for a crisis. “Beijing is in a dilemma. It can cut spending and rein in its monetary expansion, releasing over time capital for more productive endeavors (especially if it opens up hitherto closed investment options) and putting the economy on a healthier footing. However, that would mean slower growth, lower home values, rising unemployment and potential political unrest. Alternatively, it can buy a few more years of faux-growth and stability by propping up the real-estate market—and risk making the day of reckoning far worse when it arrives.”

UPDATE: Reader R.M. Jones writes: “My observation during the month (April 2010) I spent in China, in several large and small cities, they’ve got more buildings under construction and dead in the water than we do here in Las Vegas. Driving around Hangzhou and Shanghai there were hundreds of multistory building shells and nobody working.”

ANOTHER UPDATE: More happy news: Fund Flows Show An Enormous Panic.

MORE: Reader Jim Beall writes:

Those massive fund flows are not a panic. It is clear rational thought on the part of main street investors. There is the potential for deflation and there is the possibility of a recession. You are better off paying down debt for either of those scenarios. The stock market has credibility issues of being biased against the individual investor with the flash crash and high frequency trading being no small part of the problem. Bonds at the very least will provide some income and have performed very well this year, certainly better than the stock market.

The only people panicking are the stock fund money managers. They are seeing a huge drop in revenue and assets.

I’m not sure that makes me feel better.