In 2008 I annoyed some of my readers by predicting China would weather the economic crisis better than the US would. I know, the US fundamentals are stronger and China has all these really bad problems, but my argument was relatively simple: China had enough money in the bank to buy itself out of the recession, at least for a few years, while the US, mired in debt, would be in a far less enviable position.
Then I wrote four months ago:
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.
Two years earlier I wrote:
Friends have been telling me about the deranged property prices in Beijing, and once again, as with the malls, it just strikes me as common sense that this is not sustainable. And you have to consider all the ripple effects a housing bust would foment – all those migrant workers on construction sites, all the construction machinery makers, the cement and lumber providers, all the ancillary businesses, door-knob makers and house painters.
What Epstein [of Forbes] is describing mirrors to the letter what we saw in the US five years ago, and is even more reckless: flipping properties and creating massive pools of debt and the same insane mass hypnosis: “Property values can only increase!” We all know how that goes.
I do not want to see this happen… But again, my common sense tells me there’s no way he can be wrong. Any student of bubbles, from tulips to dot-coms, can see the gathering storm. I wouldn’t want to be owning any property in China when it meets land.
Now, I’m getting the distinct feeling that the inevitable may not be too far away: China’s real estate bubble really may pop. From Foreign affairs today:
For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.
Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well.
The biggest unanswered question is whether existing investors — the people holding all those sold but empty “ghost” condos and villas — will join in the sell-off, which could turn the market’s retreat into a rout.
What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.
Hours after I read that, Paul Krugman’s latest column came out and it is even more pessimistic.
The obvious question is, with consumer demand [in China] relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.
Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida….
Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?
Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.
To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.
Let me be clear: I don’t want to see China’s economy slow down, let alone fall into serious recession. There are too many people I love in China and I hate the thought of them, and the rest of the Chinese people, suffering the consequences of such a catastrophe. But I think, especially at the level of local government, that officials are playing with fire, counting on ever-rising property prices to pay for insanely huge development projects. That is a house of cards. It sounds like the US and Ireland and Greece all over again.
The Foreign Affairs article at least ends with a note of optimism:
While frightening, the popping of China’s real estate bubble is not all bad news. Cheaper, more affordable housing could also unlock the savings of China’s working-class families, unleashing greater consumer demand and helping to rebalance the global economy. Investment long bottled up in idle real estate could flow to more productive pursuits. These adjustments have been put off too long. This is why at least some of China’s leaders appear determined to force a correction despite the risks. But they know they are walking a razor’s edge.
I hope he’s right, but wonder if China could pick itself up off its feet so easily if it has a hard landing. I am just hoping the central government has enough control to let the bubble slowly deflate as opposed to popping. This has been the consensus among the more optimistic China pundits, that the central powers can navigate the economy through the most treacherous waters because they control all the levers. Authoritarianism, the argument goes, can get things done, and I agree to a point — but sometimes, as America learned in 2008, forces can gather that simply can’t be controlled and then take on a life of their own. I hope the optimists right.
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.