As China continues on its upward trajectory toward the title of the next world economic superpower, some experts are questioning whether the speed at which its economy is developing is in fact, sustainable.
In a Business Spectator report, the focus turns to what is now the world’s second largest economy, as analysts become increasingly concerned about the potential for China to suffer the same fate as the US, and suffer a property crash.
With China’s property sector undergoing a meteoric construction boom fueled by the newfound wealth many Chinese nationals are currently enjoying, commentators are worried that the growing bubble might burst just as it did in the US some five years ago.
And reports of developers going broke and leaving “ghost cities” in their wake, with half finished residential towers abandoned have some questioning whether the bubble has already popped.
Such reports have the rest of the developed world on the edge of its proverbial seat, particularly given that the International Monetary Fund notes that since 2007, China has contributed an awful lot more to world growth than any other country and will continue to do so into the foreseeable future.
Of course Australia has more to lose than most, with the resources boom that’s largely sustaining our economy at present, under threat should China’s construction sector come to a grinding halt.
After all, it’s our natural resources that the Chinese are relying on to build their new cities.
According to Senior Lecturer in Economics at The University of Queensland James Laurenceson, when one reviews the chain of events that led to America’s housing demise, there are more glaring points of difference in comparison to present-day China.
“From 1997, house prices in the US began to appreciate,” says Laurenceson in Business Spectator.
“During the 2000s, the market became increasingly infected by debt-funded speculators betting on continued capital gains. In the process, banks lent money to borrowers of marginal credit worthiness requiring little or no collateral.
“When prices stalled and then went into sharp reverse in 2006, the banks were left holding the bag, ultimately requiring a bail out by taxpayers. Banks (and firms and households) then spent the next few years seeking to rebuild their balance sheets, as opposed to extending new loans, and this process continues today.”
Laurenceson says although house prices have increased rapidly in China during the 2000’s (as they did in the US toward the end of last century), this is the only real similarity between the two global powerhouses.
“Firstly, while recent headlines have reported that house prices in China have fallen for a fifth straight month, what we have actually seen is a leveling off in prices,” Laurenceson points out.
“According to official data, prices nationwide remain steady compared with a year ago and remain marginally up since 2010. Unofficial data points to stronger price growth since 2010.”
He says that “macroeconomic” reports of certain cities experiencing significant falls in property prices don’t paint an accurate reflection of what’s really going on in the country. In fact, house prices fell harder here in Australia last year than they did in China.
Talking to the second point with regard to the US – the catastrophic collapse of the banking sector – Laurenceson says any deterioration that’s occurred in the Chinese housing market seems to have had little flow on effect to the country’s finance sector.
The main reason the banks over there have been shielded (from what is essentially a small dip in the real estate cycle), is that Chinese homebuyers tend to use their own cash and financial assistance from their extended families to purchase housing, rather than rely heavily on finance; as the more consumer driven Americans are inclined to do.
“In part this reflects cultural differences, but also strict down payment requirements imposed on borrowers by banks,” says Laurenceson.
In addition, most of the big players in China’s banking sector remain government owned; meaning the integrity of the main banks comes with government backing. And this is something the Chinese government can afford to do given their level of public debt outstanding is modest.
Finally, unlike America, China’s banking sector is heavily regulated, allowing the government to take pre-emptive steps to protect and even boost the banks’ profit margins by say fixing interest rates and in doing so, shoring up their stability.
In conclusion, Laurenceson says that although indicators such as price to income ratios in the major cities suggest property values may be inflated, the likelihood of a bursting bubble such as that of the US is fairly remote for China.
“More likely is that we are set to see a period of no or low price growth, rather than sharp declines. Of course, even stagnant house prices have implications for China’s overall rate of growth and therefore the demand for Australian natural resources.”
I’ve been very impressed with China’s ability to stick to it’s 5 year plans. And it intends to move around 20 million people from rural regions into cities each year.
Remember it is a communist country and the government controls the purse strings.
While it seems like the Chinese property market got a little ahead of itself, and is now stabilizing.
And when you read this blog and see what’s likely to happen in China over the next 20 years, as they move the equivalent of the whole Australian population from rural regions into cities each year, you can have confidence that some of those empty buildings will soon fill up.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.