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Thursday, July 24, 2014

The Beijing Bubble: Will China's Housing Addiction Damage the Global Economy?

The Beijing Bubble: Will China's Housing Addiction Damage the Global Economy?

07/24/14
Christopher Whalen
Economics, China

"The sad fact is that much of the housing construction activity in China over the past several years was neither rational in economic terms, nor sustainable in terms of basic financial mechanics."

For some time now, a number of analysts have been warning that the boom in China’s housing sector could be the catalyst for a major economic collapse in that country. Such warnings are probably overdone, however, for the simple reason that the Chinese housing market is neither free, nor does it really reflect market forces. But that does not mean that the slowdown in China’s housing sector is not an ominous development.
Since the economic crisis began in the United States and Europe in 2008, the global economy has undergone a massive change, with exports by the developed nations falling and nations such as China scrambling to adjust to this reality. In order to avoid the paramount threat of political instability implied by falling export earnings and employment, China launched into a period of massive internal investment and development that not only caused a bubble in domestic housing prices, but distortions in global markets for commodities and even housing around the world.
China’s National Bureau of Statistics reported a surge in home sales after the 2008 subprime crisis, followed by a collapse in volumes that saw sales actually fall in the first half of 2013. Much of the construction and sales of housing in China was fueled by a vast increase in credit provided by China’s state-controlled banks and companies, this again following the imperative of creating growth in order to offset the decline in earnings from exports.
Esther Fung of The Wall Street Journal reports that the slowdown in China’s housing market has had a ripple effect throughout the economy, causing a decrease in spending for goods and services that runs counter to official targets for growth and employment. But the sad fact is that much of the housing construction activity in China over the past several years was neither rational in economic terms, nor sustainable in terms of basic financial mechanics. But that does not mean that China is facing a Western-style financial correction, much less a collapse.
Read full articlehttp://nationalinterest.org/feature/the-beijing-bubble-will-chinas-housing-addiction-damage-the-10941

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