The Great Real Estate Bubble of China

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The Great Real Estate Bubble of China

Rapidly rising real estate prices, rampant speculation, and disbelief that prices won't keep rising.  It sounds like 1980s Japan or like the United States five years ago.  But it's actually what's happening today in China —and like so many before them, the Chinese don't believe the old saying, "What goes up, must come down."

The impetus for the current real estate boom was the Chinese government's response to the global economic meltdown two years ago.  As their exports dropped off, they took a Keynesian tack and embarked on a $586 billion stimulus, emphasizing infrastructure projects and real estate development.

The thought was that spending on housing complexes, office buildings, roads, and bridges would be a big employment generator, because of the many sectors of the economy it boosts.

In addition to the direct government-funded fiscal stimulus, Beijing also lowered capital reserve requirements for its state-owned banks and ordered them to dole out loans to "support growth."  This action doubled new loans between 2008 and 2009.  In the process, the country's total loan portfolio and money supply were expanded by one-third.

Is this program working?  The Trends editors give it a qualified "yes."  China's economic growth remains above 10 percent.  And nearly every member of Fortune's Global 500 is rushing to capitalize on a strong Chinese future.

In fact, after looking at China's apparent success, some American economists are beating the drum for more stimulus here as a way to accelerate the recovery.  According to an article in The Wall Street Journal,1 these stimulus enthusiasts believe "our politicians debated and dithered and fell short, [while] China's wise autocrats moved quickly to inject a massive stimulus and restore robust growth."

Economist Paul Krugman adds to this chorus, saying, "China is doing what I'm constantly urging the Obama Administration to do, which is to reverse the economic decline by a large-scale stimulus."

But many believe that the question, "Is it working?" is not even the right question to ask.  The relevant question is, "Will it keep working?"  They don't even ask if the Chinese bubble will burst.  They just wonder when it will burst. 

This belief is fueled by many factors, including the fact that government money is being used to build homes not for occupancy but for ownership.  This speculation has led to vacancies in almost 30 percent of private commercial and housing properties in China.  In fact, entire cities, such as Ordos in inner Mongolia, are empty.

According to Patrick Chovanec, associate professor at Tsinghua University's School of Economics and Management in Beijing, "Chinese treat homes like gold bars, buying multiple units as a store of value...

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