China’s real estate bubble is very real. It is driven by both private speculators and government development; and it is both a coastal and inland phenomenon.
Private speculators have treated real estate in China like a Pai Gow table in Macao.
Buyers go to pawn shops for capital. Interest rates are usurious. Speculators own multiple properties. It all only works if prices keep going up — sound familiar?
Local, regional, and central government entities have also played an important role in inflating real estate prices. They have financed massive overdevelopment throughout the country primarily as a form of job creation, with “ghost cities” being the poster child of the problem — and tip of the iceberg.
The real estate bubble will collapse if China’s economy slows much further, say from 7% to below 5%. There simply will not be the wages and profits to sustain the real estate market.
If the bubble collapses, China’s economy will have a consumption-led meltdown just like the U.S. did in the Great Recession of 2007.
If China’s economy falters, that’s bad news for both Europe and the United States as Chinese manufacturers in industries ranging from autos and steel to solar will accelerate the “dumping” of product below cost into American and European markets. This increased Chinese dumping will lead to American and European job losses and lost production.
If China’s economy falters, that’s also bad news for “commodity countries” like Australia, Brazil, Canada, Chile, Peru, Russia, and South Africa whose economic growth depends increasingly on China’s manufacturing floor.
In these ways, a collapse in the Chinese real estate market could trigger a global economic collapse — the ultimate butterfly effect. A stock market collapse will surely follow.
Will this happen? Here’s the big problem: China’s economy is still too heavily export-dependent so it is critical that both the U.S. and European economies recover soon — they are China’s two biggest customers. However, such recovery appears unlikely.
What could China do to avoid the collapse of the real estate bubble — and its own economic collapse? It needs to quickly morph to a country that depends much more heavily on internal demand than export-led growth. The three policy options it needs to pursue are: A stronger yuan to boost purchasing power and health and pension plans that would encourage more consumption by obviating the need for high savings.
Peter Navarro is the director of the documentary film Death By China and a business professor at the University of California-Irvine.
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