Some nervous observers in China are seeing too many similarities between the current state of the Chinese economy and what happened to Japan in the 1990s. For starters, the super-rich are cranking up real estate values, and the middle class is paying the
BEIJING - Will China become the next Japan? Will its economic bubble burst? Should the Chinese brace themselves for deep deflation and economic stagnation? These questions have begun to swirl ever since stock prices and real estate values started to soar.
Even though the Chinese stock market did crash some years ago and hasn't fully recovered since, housing prices have continued to rise, making for some striking similarities between China now and Japan before the appearance of the its own asset price bubble.
After the 1985 signing of the "Plaza Accord" to depreciate the dollar, the Japanese yen began to rapidly rise in value. By the early 1990s, Japan's stock and property markets had gone into a major slump. This is the period that is generally called Japan's bubble economy.
Xu Xiaonian, a well-known Chinese economist, has laid out the scenario that worries many: when China has replaced Japan as the world's second-biggest economy; and when China's bank loans to GDP ratio has overtaken Japan at its bubble peak; and when the Japanese tourists waving little flags in Paris and London are replaced by the Chinese who take off their shoes to air their feet; and when the Chinese have outshone the Japanese as buyers of art and luxury goods...all I pray is that China won't ever become another Japan.
What should be pointed out are the other similarities under the surface of the two economies: both countries have very strong exports to the United States and both enjoy a huge trade surplus; both currencies face pressure to appreciate with respect to the dollar; and both countries have huge foreign reserves. Domestically, both governments have carried out large-scale stimulus plans and have set in place looser financial and monetary policies. This has resulted in skyrocketing land and housing prices as well as investment speculation.
In order to study more rationally the probability of China's economy bursting, I sought the advice of many Japanese economists, including Heizo Takenaka, Japan's former Minister of Economy and Finance, as well as Yukio Noguchi, the specialist on Japan's bubble economy. Just as there are various reasons given for the cause of the bubble, these economists offer a range of opinions as to whether or not China will follow in the footsteps of Japan.
After speaking to the Japanese experts, I concluded the following: China's probability of becoming a bubble economy mainly depends on two factors - urbanization and the gap between the rich and poor.
China's economic bubble issue is a real estate issue and the bubble exists mainly in the real estate market. China's real estate prices are unreasonably high, simply because there's more demand than supply. The open question then is whether there is too much demand or too little supply?
In China, land supply is largely monopolized by the government, so many people attribute the shortage of land supply to the government. But even more people tend to think that the problem lies on the demand side.
A false prosperity
This is due to people's expectations of continuously increasing urbanization and rising property prices. Certain Chinese people invest large portions of their assets in real estate. Among them, the main purchasing power comes from a small group of people who own most of the wealth in Chinese society.
This minority represents the party of demand. Housing prices are determined by the level of their wealth. Real estate has become, alas, a real luxury.
Meanwhile, another population, the middle class who are neither rich nor poor, is sucked into the game as "house slaves' because of their strong desire to live in a house of their own. Left behind are the poor who can only signal their discontent. This is the basic structure of demand caused by the seriously uneven distribution of wealth.
Thus appears a false prosperity: strong demand for real estate in a market created by the rich. They speculate on the basis that a rising number of people who already live in the city will want to own their own house, and push up demand even more.
Although the logic is correct, it is difficult to quantify demand accurately. Unfortunately, under the permanent pressure of such simple logic, the rich are bound to get sucked into a market frenzy. They will finally end up in a speculative game, without having time to consider whether or not there will really be so many buyers for the houses they have invested in. Imagine a giant version of what has happened over the past few years in Spain.
In the just-finished National People's Congress, Wen Jiabao, the Chinese premier, announced the government's determination to regulate housing prices so as to cool the overheating market.
At the same time, the income of the slightly richer middle-class is not likely to rise enough in the short term to be able to afford the current housing prices.
It's certain that, after a period of stalemate, rich investors will have to lower their prices to make a sale, no matter how reluctantly.
Does this mean China is bound to burst in a bubble? It depends on how far and fast housing prices slide -- and how much it costs the banks.
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