October 10th, 2011
09:37 PM ET

What if the China bubble bursts?

By Ken Miller, TIME

What's the most important economic question in the world today? One contender would certainly be whether the euro will collapse. Another might be whether the U.S. will plunge into a double-dip recession. But a third, and possibly the most important over the long term, is whether China can find its way out of the biggest housing bubble ever created.

It may seem strange to Westerners, who hear so much about the rise of Asia and growing Chinese competitiveness. But like U.S. Republicans who try to "starve the beast" by cutting government spending, the Chinese Communist Party has been attempting to put a damper on the debt-fueled real estate boom that is at the heart of the nation's economic miracle. This is part of a deliberate attempt that is meant to rejigger the Chinese economy into one that relies more on a domestic service sector and less on manufacturing and exports. If, however, the party's efforts result in a precipitous drop in real estate values, multinational corporations whose revenue and earnings growth are tied to China could be hard hit. And the U.S. could be thrown back into recession.

See pictures of China's 90 years of communism.

The world has to care about Chinese growth, since it is an important driver of the global economy. China contributed 19% of the world's economic growth in 2010, and that's expected to increase to 24% this year. China's growing strength is essential to both the U.S. and European recoveries.

While Washington has sweated through its partisan debates on budget balancing and economists have bickered over solutions to our low-growth and high-unemployment problems, the Chinese boom of the past several decades has blasted ahead without a glitch. Much of that boom is wrapped up in real estate. In the first six months of this year, Chinese investment in real estate was up 32.9% compared with the same period in 2010, and China's economy is expected to grow more than 9% this year, about equal to its average during the post - Deng Xiaoping era of "communism with Chinese characteristics."

The popular narrative is that China's rise from nowhere in 1978 to its position today as the world's second largest economy has been fueled by cheap labor. While this is one factor, cheap capital and land have been as important. Most Chinese, who are huge savers, have little choice but to put their money in bank accounts that pay interest lower than the rate of inflation; these funds are then channeled into state-owned enterprises whose capital expenditures create the factories and buildings on which the Chinese miracle has been built.

See pictures of China's cutting-edge architecture.

But the Chinese are pretty smart about money. They see the fortunes the elites have made by buying land at bargain prices and developing it. Ordinary individuals cannot get in on the ground floor to reap the obscene profits made by well-connected officials who facilitate purchases from historical occupants, but they are permitted to invest in real estate at later stages of development, and their wealth grows every year. Anyone who's spent more than a day or two in China knows that real estate is a popular preoccupation. Apartment flipping is all the rage; real estate prices have tripled in the past five years.

See pictures of Chinese actors impersonating Chairman Mao Zedong.

The question is whether the building bubble — not only in housing but in commercial property as well - is about to burst. Everywhere you go in China, you see new airports and high-speed train lines under construction; see-through apartment buildings whose empty units loom unilluminated in the night; beautiful underutilized roads, bridges and tunnels; and newly risen ghost towns waiting for occupants. One such town, Kangbashi, in Inner Mongolia, has everything a city needs, including investors who have bought apartments on spec. Yet it remains unoccupied, as reported last year in this magazine. Why does China keep building? Because building creates jobs and wealth for those who are associated with all that development.

Read more at TIME.

Topics: China • Economy

soundoff (7 Responses)
  1. Rz

    Speculating on the potential affect to the US economy from real estate meltdown in China could have infinite possibilities. But are we talking about now? Or after the collapse of Wall Street and the US banking system?

    October 11, 2011 at 12:27 am | Reply
    • vokoyo










      October 25, 2011 at 9:06 am | Reply
  2. j. von hettlingen

    The building bubble should be addressed soon, before it bursts. A remedy could be to tax impose heavy tax on those, who made an obscene fortune out of land development and subsidise those home-buyers with lower income. Many greedy party-officials robbed land from historical occupants and became rich as real-estate developers. These parasites should be punished severely, or else the central government will lose its credibility.

    October 11, 2011 at 5:50 am | Reply
  3. hiro bachani

    dear friends- China is a very smart country- we should not under-estimate the wisdom of the chinese gene. They will surely be able to pass the crisis, if any, by spending themselves out of trouble. remember the chinese have the world"s greatest reserves – -- all they have to do is to keep on spending a little more every year, and see that their middle classes become richer-- from $ 5000 per capita to the 50,000 dollars per capita of america is a long way, so they can technically keep on spending more and more for the next 100 years and still be safe- there will be afew downturns, but not as catastrophic as you imagine- hail the new china century... best is to make friends with the new dragon rather than demonise it. India, china , all should become friends and forget their past animosities. Even India is heading for a great economic success climb -upwards. Both these giants should be the best of friends and also help to stabilise the world by investing in europe, america , pakistan etc- we have to help pakistan come back into the world equation on a peaceful and prosperity path. No country should be left out in the rising graph of world happiness .

    October 11, 2011 at 6:02 am | Reply
  4. That'snotTrue:[

    Again... CNN, you been going on about this for a long while, nothing like you said's close to happening, it's like the chicken that thought the sky was falling...=.=

    October 11, 2011 at 1:46 pm | Reply
  5. RodRoderick

    I wouldn't put so much stock into American Companies failing with China – even those who have vested a great deal into China will still move into other markets overseas to get their cheap disposable products made. Never underestimate the power of greed.

    November 2, 2011 at 5:03 pm | Reply

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