With Hainan watching their bubble burst again, Shanghai’s housing market tanking and various other bad signs from China, are we finally going to see all of China’s dominoes fall over in one epic housing explosion?
One of the biggest market fears right now is the Chinese real estate bubble bursting, and bringing down the last bastion of solid economic growth. It’s position both upstream (steel, construction materials, etc) and downstream (electronics, retail, etc) expose not only the Chinese economy, but economies worldwide to this looming threat. A sudden halt in China’s expanding real estate market could mean unemployment from local steel manufacturing plants all the way to remote iron ore mines in Australia and Brazil. Unfortunately, for those who like to watch dominoes falling, you may be disappointed. Chinese real estate has been artificially inflated to some extent, but the immediate action of the Chinese government coupled with the availability of the right tools almost ensures that this real estate bubble will once again only give the Chinese economy a small paper cut.
Let’s dig up some painful memories of housing crashes: 1980s Japan and 2000s America. Housing prices skyrocket followed by painful recovery. What’s stopping China from going down the same route? Well, it turns out, that once again, their undemocratic government saves the day.
Local governments inherently act differently from each other, and local markets respond differently to different changes in economic variables. That being said, a bust in Shanghai won’t necessarily mean a bust in Guangzhou. Rather than view Beijing and Shanghai as part of a similar market like you would view Philadelphia and New York, I find it more helpful to view them as completely separate entities, because of the extent the Chinese government can isolate and clean up a bubble. A big housing bubble burst in Hainan in 1995 was contained by the Chinese government through tightening monetary policy and “asking” banks to cancel certain loans. The versatility of both the Chinese government and the local governments allow bubbles to be isolated, meaning panic won’t spread throughout the country like it did in America and Japan. Raising interest rates and forcing banks to cancel loans are unthinkable in the democratic Japan and U.S.A. because of the large political backlash. However, the ability for the communist government to manipulate every single corner of the economy with little consequence means crisis can be averted by isolating and dealing with individual bubbles. And who is to resist the communist government? Thus, individual Chinese real estate markets may collapse in the near future, but it is unlikely that the entire Chinese real estate market will collapse as a whole. Even as tier 1 cities bust, immediate monetary tightening coupled with a few favors here and there should both contain and curb crashing prices. It is both the fast response time and extra tools the communist government has to work with that allows them to prevent contagion from spreading.
This doesn’t mean the Chinese government is invincible though, even with their secret technique of Chinese book cooking. Like all governments, there is a limited amount of resources available to the Chinese government. If busts (though isolated) occur all over China, no amount of bank favors or government policy will be able to patch up the big holes on balance sheets. So, is the Chinese housing bubble going to wreck the economy? I would say unless a simultaneous nation-wide crash were to occur, China should be able to deal with the crisis with their usual tricks.
What’s really scary though is that a lot of mortgages are to come overdue over the next 3 months, approximately the period that a large part of Greece, Spain and Italy’s debts will have to be called in, and also the crucial period before the French election. More on these two in coming weeks. Maybe we will see dominoes fall after all.
The obvious Eurozone issues aside, a storm cloud still looms in the long run for China…
UPDATE: I was honored to have the opportunity to briefly talk with World Bank Chief Economist Dr. Yifu Lin about the Chinese real estate bubble, and he agreed that it would likely take a minor toll on the economy given China’s track record.