Will the China bubble burst?
Everybody seems to be worried that the threat of a housing bubble may now be facing China after the same problem clobbered the United States and Europe in rapid succession.
Economists fear that since China is a key driver of the world economy today, the impact of a China housing bubble on the Philippines and the rest of Asia could be disastrous.
This problem is on top of other questions that remain unresolved; 1.) Will the euro collapse? 2.) Will the US inflation worsen?
Contrary to what most of us believe, much of the Chinese boom is wrapped up in real estate.
China is expected to have grown by 9 percent last year, buoyed by the 32-percent growth in investments in real estate.
China watchers attribute the strength of China’s economy not only to labor, which is not as cheap as it once was, but to cheap land and capital.
Chinese are huge savers by nature and they have no choice but to put their money in bank accounts where interest rates are lower than inflation. These funds are then channeled to state-owned enterprises that create the buildings and infrastructure that have made the Chinese “miracle” a reality. (Shades of DBP, GSIS, Land Bank, SSS, etc.)
Francis Estrada, ex-AIM president, is one watcher who shared his thoughts recently with the University of San Diego faculty/students.
Huge fortunes were made by the Chinese “elites” who speculated on land at bargain prices and developed it.
But only well-connected people could get in on the ground floor, who could facilitate purchase from historical occupants and are permitted to invest in later stages of development (with inside trading information)—and their wealth grows every year as real estate is a popular preoccupation with prices tripling over the past five years.
Nowadays, many buildings in commercial and residential areas are empty. New infrastructure projects are underutilized—triggering nervousness about the bubble. But construction continues because it creates jobs for the ordinary people and wealth for those associated with all that development.
The party is trying to rectify the debt-fueled real estate boom as part of its five-year plan. This is an attempt to make the Chinese economy more reliant on domestic sectors and less on exports (manufacturing). This is going to be a delicate balancing act.
If the effort results in a big drop in real estate values, investors will suffer and the world can be in recession.
Factories in other parts of Asia such as the Philippines can now churn out goods more cheaply than China—which prompted the re-examination of China’s model, which is focused on production and exports fueled by state capital expenditures.
More protests of party abuses have been rising lately—and the need to narrow the income gap is the message in the latest five-year plan.
One problem is how to stop the flow of cheap capital from state enterprises. For investments, directly or through others, in real estate, the “elites” continue to arrange cheap capital access, which contributes to their continued importance to the party.
If this access is curtailed and property values decline, there could be a crisis in the financial system that could have wide ripple effects.
State banks’ loans to GOCCs and other cronies, which could turn to bad debts, were either written off or classified as special investment vehicles to create a modicum of regularity in balance sheets.
But the fact is, the state banks’ capital comes from the savings of normal people—pension funds, health provisions, etc.
Hence, any writeoff by the state banks in one form or another is shouldered by the man-in-the-street. This is going to be reflected in declining household income and spending capacity.
LGUs, under the banner of local autonomy (sounds familiar?), have developed the enthusiasm for project development, increasing real estate valuation, land sale, etc., to achieve GDP growth in their regions (but not employment generating and poverty reduction).
Many of the developed infrastructure projects do not fit in the national strategy scheme of things. Hence, capital is not optimized—and underutilization is visible in many places.
If China’s bubble bursts, there will be less demand for goods and services (from both imports and locals). There will be less demand for raw materials, minerals—a steep drop in commodity markets, global trade in general.
China will do good in managing the decline of its economy to avoid a hard landing, which will not be allowed to happen before the change in its leadership in 2012.
The Chinese will show that the US and China are in the same global economic boat, for US to incentivize export of technology to help China grow its services sector. The Americans need China to be stable and growing—to buy not only its IOUs but also its goods/services.
A clear understanding of the Chinese situation will allow the Philippine economic team to anticipate the possible fallout, enabling the country to take advantage of opportunities that will open as a consequence of this possible China bubble burst.
The team members need to flesh out NOW the strategic economic plan and execution with a stronger public-private partner institution.
As mentioned by UP School of Economics’ Noel de Dios, the underlying challenge is to pursue internal strategies as the basis for future growth.
(The author is former secretary of the Department of Trade and Industry and current vice chairman of the National Competitiveness Council.)
