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Foreign Policy: China’s Bubble Trouble

May 16, 2010

Foreign Policy magazine had a good article Thursday on China’s bubbling property market, by Christina Larson.  Christina and I met up when she was in Beijing last week, and had a long conversation on this subject.  I was quoted a couple times in the piece, offering a diagnosis that already will be familiar to readers of this blog:

Economists say one significant driver of China’s soaring real estate prices has been wealthy investors in China snatching up property, because they have few other investment options . . . The answer, for many, has been to invest in one of the few options available to them — an asset whose value, within their lifetime, has only gone up and up: real estate. “Property is being held by many as a store of value, like gold,” explains Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management. “This bids up prices and also skews development toward high-end properties, as opposed to affordable housing.”

I also expressed my skepticism of the long-term effectiveness of some of the latest cooling measures that, admittedly, have sent jitters through the market:

True reform won’t be easy because it involves a painful re-examination of core aspects of the Chinese economic system, Chovanec argues: “The government is dealing in terms of edict, not root causes — but it’s not easy to just order water to stop flowing downhill.”

But even for those who have heard me say these things many times, the article is well worth reading for the anecdotes Christina offers that put flesh and bone on the theoretical arguments:

Ms. Wang, the wife of a successful Beijing businessman who gave only her surname, has purchased four homes in recent years. There’s the apartment she and her husband live in, and three others they hold as investments. All three are vacant; she’s making no attempt to rent them out. No property taxes are assessed in China, and so there’s no financial penalty for simply buying and holding. The rental market in Beijing, in comparison to the red-hot real estate market, is fairly weak, and besides, renting out those apartments — putting them to use and risking some wear and tear — could diminish their value. So they remain pristine and empty.

Near the conclusion of her article, Christina cites some disturbing and provocative quotes by Zhang Xin, one of China’s most prominent property developers.  As she mentions, they come from an interview earlier this year, one that I highlighted in an earlier post and which is well worth checking out.

In my last post, I mentioned that I had had a spirited exchange on CCTV Dialogue this week on China’s property market, and promised to post a link once it was up.  My counterpart argued that China is different, and cannot have a housing bubble because investors are paying cash.  I pointed out that bubbles do not necessarily require leverage (borrowing) to form.  Investment in real estate as a store of value, like gold, is a very persistent source of demand, but not a stable or healthy one.  If you ever had to find end users for all the empty high-end apartments being held off the market for investment purposes, the market clearing price would be far below today’s prices.  And while housing may not be highly leveraged in China, commercial real estate (offices and malls) is.  Furthermore, the banking system as a whole has extensive exposure to property risk from its reliance on collateral-based lending.

The debate over real estate is just one small part of the program; the rest is devoted to concerns about inflation, how the Greek debt crisis may affect China, and whether the Chinese economy is at greater risk of overheating or sliding into a new slowdown.  You can watch the entire discussion here, or by clicking on the photo.

5 Comments leave one →
  1. Jay permalink
    May 17, 2010 1:55 am

    You are obviously right on the property bubble issue. The Chinese government is stuck, I can see no exit. The government will choose to prop up the housing sector again once the effect of euro weakness starts to impact exports. The bubble is going to be blown bigger at the end of 2010 and in the beginning of 2011. Andie Xie says the showdown will happen in 2012, I guess that’s about right. A total collapse is likely.

  2. May 18, 2010 8:19 am

    Nice article – both of them. But we’ve been predicting financial doom for China since the late 90’s. We’ve said: The whole thing is a house of cards. It’s like a thin veneer. Just wait and see. It’s insane. This will blow up. During this same time look at what’s happened. Nothing. Some bumps and bruises, but no major meltdown. So was it a bubble when it was common at the dinner table for people to talk about how many times their property had “flipped” – as in doubled in price? In 1995 we called that catching up to the real value. Then in 2000 when an old 3-story yangfang cost a whopping RMB 2 million. Wakao! The sky was falling. Then in 2005 when a nice villa in Hsunyi in Beijing could be had for 6000psm. Fengle! Now it’s 2010, and yes there is a housing glut, and yes, most are empty, and yes, it’s overpriced in many cities. The train is definitely moving a bit too fast. But is that the end of the world? Let’s just imagine that everything blows up, and all those properties are suddenly devalued – say 80%. That would be a catastrophe correct? At least on paper. But would that be the end of the world? I think if you ask around, most Chinese, will feel they’ve taken a major punch in the gut (for some their first) but most will still actually be able to hold their property. The wealthier may have to divest of a few of their green Monopoly homes, or dump a couple red hotels and trade down to keep a prime property or two, but it doesn’t seem like this burst would tip everything over. The wealthy will still technically be wealthy. The not so wealthy, will remain just that – not so wealthy. Some may default. Others will keep the couple homes they actually own outright. Maybe some will be forced to actually rent – to the people who used to own homes but lost them – in order to cover the mortgage. Then terms like rent multiple will begin to have some actual meaning. And the poor? Well, they will as always still be poor, watching all this from behind a shovel, or a stack of dishes, or someone’s foot in a foot massage place. Their boss might have downgraded from the Porsche Cayenne to a BYD – oh the horror – but the boss will still have a car, and they won’t. Nothing much will have changed for them really, maybe they won’t be making the big bucks RMB 20/hr on a construction site anymore, or maybe they lose their comfy foot massage job and move back to their village to dig holes or tend pigs or whatever. There will still be a village, and they will still be poor. Remember, these people are by far the vast majority in China. So here’s the real question – If the mass majority doesn’t change that much, then is a property meltdown really a China meltdown?

    • Jay permalink
      May 18, 2010 10:52 am

      Not sure what you wanted to say, people survived great depression. Bubbles come and go, it’s the nature of capitalism. Predicting a bubble bursting is not the same as predicting there will be no China anymore after the bursting.
      Bubbles can last longer than you can stay solvent; it hasn’t happened yet does not mean it won’t happen, can we learn something from what has happened already?

  3. Gan Lu permalink
    May 18, 2010 7:13 pm

    Prof. Chovanec,

    I enjoy your blog. A few questions for you:

    1) How’s your Chinese? (I’m assuming that you don’t speak/read it very well.)
    2) How reliant are you on English language sources in your work?
    3) What limits does this place on your ability to understand what’s going on in China?
    4) How do you account for the supreme confidence that so many Chinese commentators express in the Chinese government’s ability to successfully manage China’s economy? (It seems to me that a recurrent theme these days among members of the Chinese commentariat is “China is different. China’s economy isn’t subject to the same economic laws as everyone else. China has the best, most effective system of government–particularly when it comes to economic/financial crises such as the one we’re living through.”)

  4. Richard Graham permalink
    May 20, 2010 1:34 am


    I was wondering what your thoughts on implementing a property tax are/the probability of it actually happening? From reading much of your work, it seems that creating a cost to hold property would discourage people from stockpiling property. What are your thoughts?


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