Hedge fund manager James Chanos will go down in history as the first to predict that Enron was a disaster in the making. Chanos is in the business of scrutinizing companies for their flaws and then making a fortune by betting against them.

Now, he is predicting that China is about to collapse. Chanos argues that China has ramped up its production, giving itself a capacity that's more than the consumption in the US, India and Japan combined. That means China will end up producing a massive amount of goods that it won't be able to sell.

The big problem is China's debt. As Fortune magazine reports, Beijing has shoveled $1.27 trillion in new loans into the economy. That's up 136% from the same period last year and the money has poured into infrastructure, manufacturing, and real estate. The problem is that when you increase lending in that way, you overheat the economy by investing the money in shopping malls, luxury stores and infrastructure for which there is no demand. Burdened with the weight of debt, the system collapses.

The problem is that the country's leadership is on a treadmill. The Communist Party leaders have to keep pouring in stimulus money, which keeps inflating the bubble, just to protect their own positions. As The Telegraph's Edmund Conway writes, they don't have as much control as world leaders think.

"There could hardly be a more reliable recipe for an asset bubble, and too many economists assume that the omnipotent Chinese leaders know better,'' Conway writes. "In reality, this bubble is being allowed to grow by a Communist party which is well aware that, if economic growth drops below a certain level, their positions could become less secure; the authorities are also less in control than they would like to be... China should allow its currency to appreciate, and bear down on its economy by raising borrowing costs. Both tactics would depress economic growth and risk social unrest, which terrifies a Communist party feverishly obsessed with suppressing any whiff of dissent. But, in avoiding difficult decisions now, China's rulers are setting themselves up for an even more violent reaction if and when this asset bubble eventually implodes."