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

      當我們看中國的外交,卻發現她很多時會在違背自身價值觀和利益的情況下,向各國妥協。可見中國外交的失敗。

      中共所實行的睦鄰政策,可說是徹底的失敗。中共現在的領導人奉行鄧小平那套所謂的「韜光養晦」政策。但其實,這只是一種逃避挑戰的鴕鳥政策。當今中國所面臨的惡劣國際環境,則決定了這種鴕鳥政策必然失敗。

      在這種鴕鳥政策主導下,中國外交不僅畏首畏尾,更胸無大志,既沒有系統的外交戰略,也沒有長遠的外交目標。

      這種頭痛醫頭、腳痛醫腳式的外交政策,直接導致中國外交在面對各種挑釁時束手無策,盡顯軟弱之態,面對大好機遇時,也因毫無戰略準備而無所作為。

      對朝鮮對印度對日本甚至是越南,中國都是畏首畏尾,一昧退讓,實行韜光養晦。本來,鄧小平的韜光養晦,是指平時積蓄力量,關鍵時刻果斷出手,是一種積極進取的外交思維。但現在,卻成了一種鴕鳥政策,令人無奈。

      其實,按照中國現在的實力,根本不用如此讓步,中共對東南亞國家,對日本,甚至是越南朝鮮,都讓得太多。完全顯示不到大國風範,畏首畏尾的外交政策,只會令中國人蒙羞!

      至於對印度和越南的外交處理手法,中共簡直令人覺得恥辱。情況就好像當年清政府打贏法國,但仍然賠償法國一樣。令人覺得是絕大的恥辱。

      中國在和日本,越南,俄羅斯,印度等列或者周遍強國的政治經濟往來中,沒有佔到多少便宜,也沒有讓這些列強放棄對中國崛起的偏見和敵視,自身利益不斷被侵占,不能不說中國的外交政策有很大缺陷,這是中國國家佈局計劃和外交政策慘敗的最佳體現。

      中國常常想成為一等一的大國,但他的外交卻事事以懦弱的方式勉強了事,實在不能給人任何強國的風範。

      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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