2009 December 23 Wednesday
China Real Estate Bubble Next To Pop?

Double dip recession anyone?

“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.

Halt of economic growth in China would be deflationary for the rest of the world. China's demand for oil could drop and lower oil prices. Commodities prices would fall across the board.

Real estate bubbles are great for renters.

Although parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can’t be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What’s clear is that the bubble is inflating at the rich end, while little low- cost housing gets built for middle and low-income Chinese.

The article points to a part of Beijing where apartments sell for 80 times average annual income of the city's residents. America's real estate bubble was wimpy by comparison. What's 5 or even 10 times annual income as compared to 80 times annual income? Once again China beats America in an economic competition. We make a bubble. They make a more distorted bubble.

Can the Chinese government keep the Chinese economy growing?

I'm reminded of Jim Rogers on the US economy. China is also using debt to reflate its economy. Though Jim Rogers is far more optimistic about China.

"It's getting worse, not better."
That's how Jim Rogers responds to the recent talk of improvement from President Obama, Treasury Secretary Geithner and Fed Chairman Bernanke, among others.

"Papering over the problem is not going to solve America's problem," Rogers says. "The idea you can solve a problem of too much debt and too much consumption with more consumption and more debt defies belief. I cannot believe that grownups would stand there and say that."

The Chinese are also effectively papering over the problem. They pursued a massively expansionist monetary policy in 2009. How much damage will the Chinese economy suffer from an end to their real estate boom?

Update: Why is the Chinese government pursuing such a reckless economic policy in order to keep the economy growing? Christopher Hayes points out that China's government derives its legitimacy from rapid economic growth and fears a rebellious population should the growth stop.

There is no formal social contract that regulates the relationship between members of this ruling class and the people they rule, but there does seem to be an implicit one. It is roughly this: we (the government) provide you (the citizens) with 8 to10 percent annual GDP growth, 24 million new jobs a year and the chance to win the capitalist lottery of sending your son or daughter off to a prestigious school with the promise of a life of industrialized luxury. In exchange: you don't question the legitimacy of the Chinese Communist Party.

This is not the easiest contract for the government to uphold, and it has already shown some signs of fraying. As recently as 2007, there were 80,000 protests a year in China, and the Internet has given a platform to increasingly rambunctious critics of government policies. The most potent issue is corruption, which captured wide public attention in the wake of the 2008 Sichuan earthquake, when many blamed corruption for the fact that school buildings that collapsed had dodged building codes. Several Chinese officials told us corruption was the biggest threat the party faces, the "threat from within," as one put it. Despite high-profile "crackdowns" (such as a trial currently under way in Chongqing involving 9,000 suspects), a recent China News Agency poll shows that corruption remains the number-one issue on the minds of Chinese citizens.

Corruption aside, there are also the raw economic challenges of maintaining hypergrowth, particularly at a moment of global contraction. Exports make up 35 percent of Chinese GDP; in the past year they fell by 25 percent. There are 6 million recent college graduates who need to find jobs. One Chinese hedge fund manager showed us an article for a newspaper about new graduates flooding a job fair, where the ratio of attendees to jobs was 7.5 to 1. What would happen, I asked one local party official in Yinchuan, a city near the infamous Three Gorges Dam, if unemployment in China went to 10 percent? Before he answered by saying that such a situation would be impossible under the current system, one of our chaperones, a very savvy diplomat who had served in the foreign ministry, leaned over to me and said, sotto voce, "The government would collapse." He chuckled after he said it, but I think he was only half joking.

Can the Communist Party stay in power?

On the bright side, the Communist Party is a bulwark against communism. The Communist Party also opposes democracy that will lead to socialism and stealing from the rich to give to the poor.

Xu argued that this is all part of the plan: "Let's look at our neighboring Asian countries," he said. "South Korea: its peak developing speed was reached using military rule.... Indonesia was successful during the reign of Suharto but recently it faces stalemate and difficulties." The reason that democracy is an obstacle to economic progress, Xu said, is that "the poor people want to divide the property of the rich people.... If we Chinese copied the directly elected situation today, people will say, 'I want everyone to have a good job.' Someone will say, 'I will divide the property of the rich people to poor people,' and he will be elected. It is useless: parity will not solve the problem of economic development. That is why we are taking a gradual and step-by-step approach in reform. As Mr. Deng said, we will cross the river by touching the stones. We will not get ourselves drowned, and we will cross the river."

Share |      By Randall Parker at 2009 December 23 05:15 PM  China


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