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Can China maintain pace of economic growth?

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People talk about China’s continued economic growth almost as if it is a foregone conclusion.

But Bruce Jaffee, emeritus professor of business economics and public policy at Indiana University’s Kelley School of Business, isn’t so sure.

He said much of the recent economic growth has been driven by an infrastructure spending spree and strong exports.

“That just can’t be sustained at this level, and with all the leverage, the focus on construction, and elements of speculation in housing, the bubble is likely to burst,” he said.

Anemic economic growth in China’s key export markets—Europe, North America and Japan—will force the country to rely more on domestic consumption, he said. But he thinks buying power in the country will suffer from a correction in housing.

“I think to meet their goals for the next five years, the next 10 years, is going to be a real struggle,” Jaffee said.


Housing prices have skyrocketed in China. China Economic Quarterly said the average price of a home rose from $59,899 in 2008 to $77,732 in 2010—a nearly 30-percent increase.

Many observers play down the potential for trouble, in part because the economy has performed so well for so long. China’s gross domestic product has grown more than 90-fold since Deng Xiaoping ditched hard-line communist policies in favor of free-market reforms in 1978.

But even bullish observers see problems—most notably a huge disparity between rich and poor, many of them living in rural areas. Government figures show the top 10 percent of urban Chinese earn nine times that of the poorest 10 percent—a ratio that drastically understates the reality.

“China’s rich are more numerous and also far richer than official data let on, and their share of national wealth is rapidly rising,” China Economic Quarterly said in December.

“The sociological consequence is that China runs some risk of becoming a two-tier, Latin American-style society of haves and have-nots, run for the benefit of crony capitalists.”•

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  • Think Again
    The problem is all those flats are luxary flats, not ones that an ordinary middle class person would ever be able to buy. Much too expensive. China's economy will crash, bending the rules leads you nowhere. History tells us all anyone needs to know already. China today is no different then the Soviet Union was.
  • Think Again
    The problem is all those flats are luxary flats, not ones that an ordinary middle class person would ever be able to buy. Much too expensive. China's economy will crash, bending the rules leads you nowhere. History tells us all anyone needs to know already. China today is no different then the Soviet Union was.
  • Yes, Really
    As I understand it, the U.S. and China are near equal in terms of the Gini coefficient, so I'd agree that pointing to income equality is hypocritical. However, perhaps it's more of an issue of perceived income equality. Income equality may be perceived as being greater in countries with high levels of corruption such as China. I don't know that this is actually true, it's just a guess.

    With respect to the real estate market, your observations do not support your conclusions. Of course there's demand, that's exactly what creates a bubble. It's that the demand is speculative in nature. Just as there was "real" demand in America's bubble, but that demand was speculative. If a significant portion of the purchasers are buying to hold onto in expectations of capital appreciation, then it's probably fair to say that the market is at least partially fueled by speculation. It's really no secret that real estate speculation is at work in China.
  • Oh Really?
    How does the China GINI index compare to that of the U.S., where the top 400 household owns more assets than the bottom 60% of the whole nation added together?

    Americans' "knowledge" about the Chinese economy is even worse than their knowledge of American citizenship. There is no bubble in the Chinese real estate market, because there is actually demand for all those flats. And that demand is only going to grow as the urbanization rate grows. Today, most of the land occupied by rural folks in China are NOT marked to market, because of the theory that the nation owns the land. But that is changing, and the accounting rule changes alone is going to keep that GDP growing at double digit rates for another 50 years. Add to that the really ambitious (tens of trillions of dollars) engineering projects to move water, anyone counting on that 30 years long growth to slow down any time soon, will be very disappointed. Ask Chanos.

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