What if China’s bubble bursts?

What’s the most important economic question in the world today?

While many of us are concerned about the collapse of the euro or whether the US will fall back into recession, closer to home a more important question could be: will the China property bubble burst?

Anyone watching China in the last few years must be wondering if it is another bubble in the making. We all know that Australia’s future prosperity is substantially reliant on the resources boom, and a large part of that will depend on China’s growth.

What has all this got to do with property?

Well, the health of our property markets is intimately intertwined with our general economic prosperity.

Of course it’s not just Australia that relies on China. China’s growing strength is essential to recoveries both in the US and Europe, as the country contributed 19% of the world’s economic growth in 2010, and that’s expected to increase to 24% this year.

The strains of the last three decades of growth are starting to show

There are now widespread reports of a property bubble in China, with stories of large cities full of new high-rise buildings that remain unoccupied. “Ghost cities” are signs of a property bubble in anyone’s language. 

And the Chinese factories that make things the world wants are having difficulty competing with other Asian countries that can now churn out goods more cheaply.

In response the Chinese Communist Party has been attempting to put a damper on the debt-fueled real estate boom as part of a deliberate attempt to rejig the Chinese economy into one that relies more on a domestic service sector and less on manufacturing and exports.

What would a China slowdown mean to us?

It’s already started. China’s economy grew 9.1% in the third quarter of the year, the slowest pace in two years.  

This has some analysts asking if the bubble will burst or if there will be a soft landing.

Economists disagree on the answer.

Only time will tell, but China’s economy expanded 10.4% last year and growth is forecast to slow to 9.5% this year.

But remember, this is six times the pace of the US and euro area, according to the International Monetary Fund. Expansion of 9% in 2012 will be eight times as fast as the group of 17 nations that share the European currency, it forecasts.

Let’s put it into perspective

Here are some more numbers quoted earlier this year by as ANZ’s Paul Braddick as he explains what could happen in China between now and 2025

• 350 million more people will move to the cities – 103 million have moved to urban areas since 1990.
• 221 Chinese cities will have 1 million-plus people living in them – the whole of Europe has 35 today.
• 1 million kilometres of new road and 28,000 kilometres of metro rail will be laid.
• 170 mass-transit systems will be built – twice the number that all of Europe has today.
• 40 billion square metres of floor space will be built in 5 million buildings.
• 50,000 skyscrapers (30 storeys or more) will be built – the equivalent of building two cities the size of Chicago every year.
• 97 new airports will be built.
• One in seven planes assembled by Boeing and Airbus will be delivered to China.
• 1,000 megawatts of coal-fired power capacity will be commissioned every week – equivalent to 4 million tonnes of new coal demand.
• One wind farm turbine will be built every hour and a half.

Now if those numbers haven’t blown you away…

I found some of these numbers in The Telegraph interesting reading: 

• 1.3 billion – China’s population as at 2009.
• 10.3% – China’s GDP growth in 2010.
• $US183.1 billion – China’s trade surplus in 2010, a decline of 6.4% compared with the previous year.
• 6.06% – China’s official one-year lending rate, up 25 basis points from 5.81%. China last raised interest rates on Christmas Day last year.
• 3% – China’s official deposit rate.
• 4.6% – China’s rate of inflation in December 2010, down from a 28-month high of 5.1% the month before. Inflation for 2010 as a whole was 3.3%.
• 7.2% – Official food price inflation in 2010.
• 73 years – Life expectancy of someone born in China in 2008, up from 71.3 years in 2000 and 46.6 years in 1960.
• 4.1% – China’s unemployment rate as at the end of December 2010.
• 42 million – The projected population of China’s newly planned “mega-city”. If projections are correct, the city would be 26 times bigger than the greater London area and twice the size of the entire country of Wales.
• 94% – Literacy rate of people aged over 15 in China. This compares with 65.5% in 1982.
• $36.4 billion – Amount of new loans the biggest state-controlled commercial lenders gave out in 2010, much of it for property development.
• 70% – Increase in sales of land-use rights to developers in 2010.
• 6.4% – Amount property prices rose in 2010.
• 1 million – Number of people living in underground bunkers in Beijing.
• 14.8% – Increase in retail sales in China during 2010.
• 39 – Average age of Chinese millionaires, according to the Wall Street Journal.
• 8.4% – Average annual pay increase at multinational companies in China last year, according to a report by Hewitt Associates.
• 1 million – Number of Chinese tourists who visited the US during 2010.
• 500 billion yuan (£47.3 billion) – the amount of direct economic losses caused by extreme weather in China in 2010, according to the chief of the National Climate Centre.

What’s ahead?

The anticipation of a slowdown in the Chinese investment boom has fuelled a host of pessimistic projections about how China will crash and cripple the rest of the world.

However Bill Mitchell, research professor in economics and director of the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle, has a different view.

He believes the Chinese government is totally on top of managing their economy, which sets it apart from the leaders in the advanced world.

Mitchell says that China will not let a major economic crisis occur within their its borders, explaining that it has so much more scope to expand, although we will all rue the environment impacts of that expansion.

Mitchell suggests their problems are going to political – taming an increasingly rowdy middle class. For the rest of us, China provides an economic example, according to Mitchell – when all other sources of expenditure fail, turn on public spending, do it quickly and don’t err on the conservative side.

We are in for some interesting economic times ahead. As always, savvy investors prepare for the worst and look forward to the best outcome.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog.