Slowdown, Not Crisis, Foreseen

Economists expect China’s soaring property prices to level off without spurring a crisis.
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Two workers walk past new apartment blocks under construction in Beijing on April 29, 2010.
Two workers walk past new apartment blocks under construction in Beijing on April 29, 2010.
AFP/Liu Jin

By Michael Lelyveld

BOSTON—The bubble in China’s real estate sector is likely to deflate rather than burst and bring down the market, economists say.

After a stunning 42 percent jump in sales last year, officials including Premier Wen Jiabao have warned that China’s housing prices are rising “too fast” and have vowed to discourage speculation.

Concerns over a housing bubble have followed a 24 percent surge in average property prices in 2009, according to National Bureau of Statistics (NBS) data.

Home prices soared as much as 87 percent in Shanghai, the London-based DTZ real estate group reported in January.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, said the government has gotten the message that strong steps are needed to contain runaway prices.

The question is how far it will go to curb speculators’ profits and keep prices affordable for average home buyers.

“The Chinese authorities are aware, but property bubbles are extremely pleasurable,” Hufbauer said.

“A lot of people are making a lot of money, or at least on paper they’re making a lot of money.”

Significant boost

The real estate boom has provided a major boost for China’s economy.

Despite efforts to shift the basis of growth to consumer spending, investment still accounted for over 92 percent of GDP expansion last year, the NBS said.

Local governments also reaped the benefits with a 60 percent rise in land sale revenues to 1.59 trillion yuan (U.S. $233 billion) last year, according to the Ministry of Land Resources.

“The question is whether the authorities have the grit to tell a lot of influential Chinese that they can’t get rich tomorrow,” Hufbauer said.

Officials have already ordered higher down payments and placed new restrictions on buying of second and third residences.

The government has tried to rein in lending by banks, raised reserve requirements, and increased the land supply for sales, hoping to cool the market down.

Hufbauer sees danger if the bubble bursts, potentially dragging down construction-related industries like steel, aluminum, and cement.

In the worst case, the effects could be felt beyond China, stalling global recovery.

“If that happened in China, then the great growth beacon for the world economy would suddenly get dimmer,” Hufbauer said. But so far, that remains a big “if.”

Hufbauer said there are major differences between the bubble problem in China and the real estate slump in the United States.

“They are dealing with it at a much earlier stage than we did,” said Hufbauer, noting that mortgages in China have not been packaged into debt instruments to create another major market for investment.

Risk understood

University of Pittsburgh economics professor Thomas Rawski said the government’s actions are a sign that it recognizes the risks.

“It’s absolutely clear that the Chinese government authorities feel that there is some sort of a real estate bubble in progress and they are reacting strongly to try and curb what they see as an excessive run-up in prices,” he said.

Rawski also doubts that a downturn in property would flatten China’s economy.

“I think it’s possible that there could be an abrupt fallback in real estate prices. [But] I don’t believe the sort of wider economic pullback that we saw in the United States and Western Europe is likely,” he said.

Rawski agrees that the impact of the real estate crisis in the United States was magnified by complex financing mechanisms that insured debt in the sector.

“There isn’t anything analogous to that in China,” he said.

Although China may see a slowdown in construction and a rise in bad loans, it is unlikely to suffer major damage.

“The Chinese have shown their ability to cope with bad loan problems before, and I expect that they’ll be able to cope with the upcoming round of bad loans, whether or not there’s a big real estate component,” Rawski said.

Rawski also doubts that the impact on follow-on industries will be great, because China will continue to grow in other areas like highway construction while the economy will benefit from recovery in world trade.

‘Chinese bubble’

Derek Scissors, research fellow in Asian studies at the Heritage Foundation in Washington, said the bursting of the property bubble may bring problems but not an end to economic growth.

Instead, Scissors sees it as another episode in the boom-bust cycles that have swept other sectors of China’s economy.

“We’re going to have a property bust, we’re going to have lots of empty buildings, we’re going to have some people get hurt, and we’re going to have some weakness in construction activity,” said Scissors.

“But we’ve seen this all before in China and it’s not a disaster, and it’s certainly not going to be a disaster for the global economy,” he said.

“It’s a bubble, but it’s a bubble with Chinese characteristics.”

Scissors said any weakness in commodity prices as a result of the bust would have a “mild influence on the upside” for the world economy as recovery continues, rather than threatening to push it into a “double-dip” recession.





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