For some time now, China has been an economy on the boom, maintaining GDP at levels around 10 percent, and soaking up demand for oil, coal, and food as more of China's population move into the middle class and buy cars, own better houses, and do business. This demand has done wonders for countries rich in natural resources - once such example is Australia where China has large holdings in coal, where huge amounts of investment have continued to keep the Australian economy buoyant, even with the recession following the 2008 financial crisis. China's growth is keeping the global economy on its feet. However, many are inclined to wonder if China's growth is really sustainable like has been the case in the past, as real-estate loans come into question. Recently, the government has been ordering stress tests on such loans by China's big banks. The picture is increasingly not looking good with trillions of dollars of loans being put as "questionable repayment capacity" and government officials issuing a statement this week say that "the sustainability of development of China's macro-economy faces uncertainty". As a result, investors have seen downgrades in expectations of investments in China. This has created wide speculation that China may be on the wake of something along the lines of the 2008 financial crisis. But is this really China's symptoms of it being on the edge of something big, or is this simply just a country showing growing pains, but not a financial meltdown around the corner?
Speculations have run rapid that something is brewing, not just with the status of many real-estate loans in China at question, but also with the continued chain of supply of what is being called 'easy' or 'cheap' money, keeping the housing market afloat. Much of this investment has accumulated from the state, where huge investments which were made with the recent 2008 financial crisis in the United States, threatening to dampen growth in China. Interestingly enough though, many are inclined to see this as the key ingredient to how China may be generating a financial housing 'bubble'. One such article was written by Vikram Mansharamani in The Korean Times, and talks about the growth of China's housing market having an intrinsic link to such 'cheap' money, with over-investment from the Chinese government leading to huge amounts of unnecessary consumption and waste. Examples of such have been sighted by others, with Time Magazine pointing that malls seem to exist in China, that with even all the investment it took to make them, remain largely empty of shops. To many this is alarm bells, not only because of the wasted investment, but also because this seems similar to the prime ingredient that many are inclined to point to as causing the 2008 financial crisis in the United States. With the Clinton Administration willing to set up huge funds in banks to help more people buy homes at lower deposit rates, they creating an oversupply of loans, which many see eventually leading to a culture of defaulting that lead to the crisis of 2008. But is Mansharamani really on the mark here, and the same thing is happening in China? Oversupply might be a fair issue at hand, but I think Mansharamani has it wrong here; it isn't the only one, nor is it the most important 'bubble' symptom here.
I remember reading an article in The Economist back before 2008 and the financial crisis happened, that reflected on the huge amount of growth that had happened globally, and considered that recent sparks in inflation might cause a minor blip in growth, as the United States and the worlds markets adjusted to the huge amount of growth. I cannot help think back to that article now with relation on China. Inflation has been astronomical in China as of recent, with consumer prices rising 5.4 percent, according to recent data, the highest ever experienced by the country. Rising prices of fuel and food, with swarming demand, have left prices on a constant rise, and many in China left trying to keep up. Recently, I noted a protest in China of truck drivers, saying they with such high prices of oil they could not afford to do their jobs, and make a profit. Inflation should be the key consideration, because it might make a number of people unable to afford paying their mortgages, whilst also squeezed with increasing food and fuel prices as well. If that happens, we could see a huge amount of defaulting of people who own homes in China, which could lead to fluctuations in house prices and loss for investors in the housing market. But I really wonder if we will see it like we did in the United States, it may be the case that a lot of demand still exists for homes and that any drop in prices would be halted with continued home buying of those who can afford to. There still remains a lot of pressure to own homes, particularly amongst young Chinese men trying to impress their potential wives - which with help of the 'one child policy' - are in the few compared with men, making the expectation that a potential male husband-to-be has a home high.
As far as I'm concerned a few empty malls or over-building of houses doesn't prove that China has a 'bubble' in its real-estate market. With growth that remains unimaginable to many in the United States, there is the possibility that all this building is only access and left empty for the time being, as China's real-estate industry struggles to try and keep ahead of demand from a growing middle class population. But if interest rates go up as the government tightens the supply of the yuan, they are going to have to do something about inflation. Yang Yao in a recent article for Today Online points this out, suggesting that the Chinese authorities need to look to loosen restrictions on imports - particularly in the case of food - and make customs procedures simplier, and try and lower inflation. However, this may not be as easy solution, with China's want to import deflation potentially leading to an export in inflation, as more of global food supply gets clogged with China's demand. All on all, I think whether China's real-estate market goes 'pop' depends on whether inflation is really slowing growth, if their is a 'tug of war' when it comes to the global food market, China could have a real problem on its hand if inflation doesn't slow to the pace of wages. My prediction would be, along the lines of 'The Economists' optimism back in 2008, China will go threw a brief adjacent with inflation. But be warned, like the weather man, I could be wrong. As for if China really does have a 'bubble' on its hands, I think we will really just have to wait and see. Even if this 'Beijing Balloon' is full of helium and continues to rise, eventually all balloons go 'pop'; assuming there is a bubble in China's market that is.
