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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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.
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.