The alarm bells of China

Recent growth in China has relied mostly on the surging real estate prices

The global economic recession as many are aware of, was brought about by two factors. Firstly, there was an unrealistic boom in real estate and secondly, there was rapid growth in credit creation, debt that was created without the means to back it. Once the bubble burst, and a vacuum was created, that is where traditional economics failed to rescue the affectees from the rubble. There have been austerity measures, and other similar initiatives, that were high on rhetoric but low in effectiveness, and ultimately what we had was one very foul smelling broth.
In the aftermath of the global economic meltdown, all eyes have been on China to be the dark horse, the vigilante that rescues the world from its problems, but China has been rather unwilling to don the superhero costume, to step in to the shoes of a saviour that everyone wants it to be. And there are reasons why China has hesitated to do so. Let us try to understand the following narrative. Recent growth in China has relied mostly on the surging real estate prices and coupled with growth has been a rapid rise in credit, with the bulk of the steroids being pumped through ‘shadow banking’ devoid of government guarantees or supervision.
However, slowly, like all bubbles this one too is bursting, and there are some strong reasons to smell economic pressures on the Chinese economy. What compels me to resort to this line of thinking is simple, while the Chinese economy was growing household consumptions have somewhat lagged behind the overall growth in the economy. When looked at, consumer spending is roughly 35 per cent of the total GDP. One could begin to explain this phenomenon by stating that 1/3rd of the worlds savings originate from Asia, but despite that, this figure is quite low. Secondly, the bulk of Chinese goods are bought by the minions across the world. While the consumer spending of China declined, the country has largely relied on expanding exports to keep the manufacturing growth steady. The million dollar question however is that Chinese investment has soared to nearly half of the GDP. It’s a paradox to say the least, which then forces one to ask the obvious question. Despite consumer demand being relatively weak what fueled all the steroid injections in the Chinese economy. And the answer might just lie in the real estate bubble we talked about, earlier. The figures validate the narrative we are trying to establish here, since 2000, the real estate investment in China has doubled as a percentage of GDP that accounts for nearly half of the overall rise in investment. The rest was fueled by those corporations that were facilitating the growth of the real estate bubble.
Skeptics would ask, how we could be so sure that it is indeed a real estate ‘bubble’. One can never say for sure, however in the last few years or so we have seen one too many a bubbles to not be able to distinguish one from the symptoms that it demonstrates. All the signs seem familiar, from the bubbles witnessed by economies across the world. And there are parallels to be drawn from the example of the US as well. After all the real estate and household bubble that gave rise to credit creation came from a shadow banking system in America. While hard data is never too revealing and thus even in America it was rather hard to predict the coming of the apocalypse, but the symptoms are there and one can hope that like many commentators say, the Chinese leadership is smart and strong enough to cope with the storm in the making. If the balloon bursts, the repercussions would be debilitating for the global economy particularly in the wake of the European debt crisis.

The writer is a professional banker and financial commentator. He can bereached at [email protected]