June 6, 2011
The China Bubble:
Economic Growth’s Last Stand?
There is one more similarity between Japan and China that is worth mentioning. During the 1980s, real estate prices in Tokyo were jaw-dropping. In the Ginza district in 1989, choice properties fetched over 100 million yen (approximately $1 million U.S. dollars) per square meter, or $93,000 per square foot.
Prices were only slightly lower in other major business districts in the city. By 2004, values of top properties in Tokyo’s financial districts had plummeted by 99 percent, and residential homes were selling for less than a tenth their peak prices.
Tens of trillions of dollars in value were wiped out with the combined collapse of the Tokyo stock and real estate markets during the intervening years.
Once again, China is following in Japan’s footsteps. Massive real estate projects—houses, shopping malls, factories, and skyscrapers—have been proliferating in China for years, attracting both private and corporate buyers. As prices have soared, investors have turned into speculators, intent on buying brand-new properties with the intention of flipping them.
Building is being driven by artificially inflated demand—the very definition of a bubble. And this is resulting in oversupply. In city after city, acres of commercial space sit vacant. Indeed, whole cities intended for millions of inhabitants have been built in the Chinese interior and now stand all but empty. Some might argue that the Chinese are investing in infrastructure now in anticipation of many millions more citizens moving into urban centers over the coming decades—however, this presupposes continuing rapid economic growth, which is exactly what is in question. If growth sputters, this infrastructure overbuild will be a dead weight on the Chinese economy.
Though Beijing initiated an effort to cool the real estate and stock markets in 2008, the global financial crisis forced officials to relent in favor of lavish stimulus spending on shovel-ready infrastructure projects.
The Chinese funneled 4 trillion yuan (about $590 billion) into what in many cases turned out to be yet more empty new shopping malls, empty new cities, and empty new factories.
For Chinese citizens, investment in the stock market hardly makes sense, given dramatic episodes of turbulence in recent years. Instead, a condominium or a house is seen as the most sensible and profitable investment. But this results in a bidding up of prices to the point where, in major cities like Beijing and Shanghai, a condo can cost 20 times a worker’s annual salary. A worker in Tokyo might expect to pay only eight times her annual wages for a similar property.
What are the chances of putting off a property price meltdown? According to a November, 2010 article by Wieland Wagner in the German magazine Der Spiegel,
“Cao Jianhai of the Chinese Academy of Social Sciences in Beijing likens the Chinese economy to “a volcano before an eruption.” Nevertheless, he doesn’t believe that the government of Hu Jintao, the Communist Party leader and president, and Prime Minister Wen will allow a crash to occur before its term in office ends in 2012—local governments are too dependent on the real estate boom. According to Cao, Beijing will go to “any expense” to pump money into the financial system and spur a renewed surge of rapid economic growth.”
Once Hu and Wen are gone, however, it will be up to their successors to deal with the fallout from a housing crash.
Economic Growth’s Last Stand?
China is no more able to sustain perpetual growth than any other nation. The only questions, really, are when its growth will stall, and by what pace and to what degree its economy will contract.
The property bubble is likely to be China’s biggest short-term problem, and it could have knock-on effects on the nation’s banking system. The bubble could start to deflate as soon as next year, or the year after. Beijing will do what it can to prop up growth and tamp down social strain, and this could buy another couple of years—though there is no guarantee that the effort will succeed.
Over the longer haul (the next 2-10 years), China’s greatest vulnerabilities are in the areas of energy, demographics, and the environment (water, climate, and agriculture). By the period 2016 to 2020, problems in these areas will accumulate and become mutually exacerbating, and it will eventually be impossible for China’s leaders to plug all the leaks in the dike.
Already, China’s social structure is stressed, as can be seen from the many regional rebellions that take place each year (but that go mostly unreported in world media). This is the main reason the central government is ruthless with respect to press and Internet freedoms and other civil liberties.
Talk to a businessperson from China and you may hear how the continued expansion of the Chinese economy is inevitable and unstoppable. But peer beneath the surface and you will see roiling, boiling ferment.
We have discussed China at some length, not only because it has become the world’s second-largest national economy and is the world’s foremost energy user, but because it is emblematic. India, Thailand, Indonesia, Malaysia, and Vietnam are each pursuing somewhat different paths toward the same grail of rapid economic growth, but their strategies and vulnerabilities are sufficiently similar that an understanding of China’s predicament provides useful context for gauging these other countries’ prospects.
China is likely the site of world economic growth’s last stand. This nation, together with the other Asian “tigers,” comprises the main engine of expansion that remains after the faltering of the older, more established economies in North America and Europe.
When China sputters, the quickening slide of the global economy will be clear and obvious to everyone.