We’ve seen all kinds of warnings over the years about China’s economy. Several years ago it was all the rage to talk about the “hard landing” China was in for after so many years of growth. Never happened. The banks were going to implode and drag the country down. Never happened. The property bubble was going to pop. Hasn’t happened yet (though I think it’s inevitable). Doom and gloomers also made the general prediction that China’s collage of overwhelming problems — the environment, corruption, local unrest, the class divide — would all contribute to “the coming collapse of China.” It was imminent. I thought so too, back in the earlier days of this blog. Yet China keeps on going, the same existential problems dragging on it like shoes stuck in tar. And yet it keeps going.
Since so many “experts” have been so wrong for so long about China’s economic downfall, it’s risky to point to yet another calamity and say it could bring things crashing down. Maybe the effects of inflation won’t go that far, but I’m not so sure.
Just about nothing is as catastrophic as rampant inflation. A deflationary depression is the only thing worse, but they’re pretty close. As prices inflate, your money can be turned into confetti before your eyes. And it forms a vicious vortex as everyone demands more pay which only fuels higher prices and rents, and one thing feeds on another and the catastrophe spirals out of control.
This is the topic I hear most about from my friends in China. I saw it when I was there about five months ago. The hotel where I often stay in Beijing had gone from charging about 550 RMB per night to 1,000. (I stayed at a Home’s Inn that trip. 225 a night, though you do get what you pay for.) All the food prices had soared, and all my friends were concerned about their apartment rentals gulping up much of their salaries.
Calling a top to China’s property bubble has been as fruitful as those calling for the immediate collapse of China’s banks several years ago. What we do know is that property inflation can’t last forever and there has to be a dramatic drop in prices at some point. Nothing only goes up. Witness the US real estate catastrophe.
For a good overview of the crisis I recommend this post from one of my favorite blogs (and one that practically never mentions China). Although I’ve always loved the outrageous bargain of China’s taxis — you can take a cab from one end of Beijing to another for less than $15 — your heart has to go out to the taxi drivers who are being pushed further and further down the economic ladder.
The blogger seems optimistic that the CCP will take the sane approach and allow the yuan to appreciate. I hope he’s right but am not nearly so sanguine. The party seems convinced that inflation is tolerable compared to a drop in exports and the pain that would come with it. Along with exports, infrastructure stimulus — construction — seems to be the only way for the government to create jobs and keep the economy pumping, and slowing it down could lead to massive unrest.
My own amateur opinion mirrors what I recently read in this superb post that is too complex and detailed for me to quote from, but that should be read by all. The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.
In the meantime, my heart goes out to the Chinese people. Inflation is devastating, and I hate to think of how many decent people are going to see much of what they worked for washed away.
Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.