Can China avoid a bubble?

I wish the Economist would use more colours in its graphs.

I don't think China is going to have US style of property crash because Government is trying to cool down the market. buyers need to pay big down payment and make themselves less geared. Chinese banks have very high reserve ration 20% (they can only lend out 80% of customer saving). Chinese home ownership is no way as high as American does. of course slow down of Chinese property market would hurt Chinese economy. however Chinese government's new 5 years plan will inject huge amount of money to stimulate growth from other kinds of industry.

The question for non-Chinese residents is, what impact will a property bubble burst have on the global recovery, or the trade imbalance?

What history is showing is that a strong manufacturing base is the strongest pilar of a sound and solid economy. A services-based economy may work well for relatively small economies that are well integrated with strong economies (like Switzerland or Austria which are very tied economically to the EU, most especialyy to Germany's).

As long as China's growth is based on producing stuff that you can touch and the whole world wants to buy - China's products have a good price/quality ratio, in general (just ask Wallmart and look into almost every single Western household) - there is not a whole lot to fear that it will collapse in the near future. And if it does, it's likely to be because the rest of the world already hit the skids. Additionaly they have already an impressive internal market, which they didn't until about 10 years ago, that can help absorb external shocks.

The US unfortunately embarked into getting rid of its manufacturing base and move the bulk of its economy to services. Its economy is decadent in relative terms and what still preserves the US economic power is its scientific and technological prowess. Its disgrace is the emphasys on the hot air side (services, finances, etc). Japan was great when it was a manufacturing superpower. As it diverted more of its economy into the gaseous side (finances and services, mainly) its decadence started. This mistake has (at least not yet) been commited by Singapore, Korea and Germany - which are doing great as their manufacturing base gets only stronger as times goes by. Dubai's growth was and still is very prone to crash as it is based on services and real state almost exclusively. And if India continues to base their economy too heavily on services it will be very fragile too.

After all, whether this magazine agrees or not, people will always need and want stuff that are more of tangible - rather than intangible - nature to live well. So, as China gets richer by producing tangible goods it will be able to sell lots of buildings and that for many more years - given the existing deficit of them - even as they get built at a faster rate than their PIB's growth.

Street lights from cities are easily visible from the ISS. How is it possible for a country to join in the free market mania and still politically act like tin hat dictator? China has has a 15% increase in nominal GDP: 8% of which is accounted for by the GDP deflator or inflation, and 7% accounted for by increase in real GDP. Raising the Yuan against the Dollar will cure the stagflation disease of the skin, but hawkish fiscal and monetary policy will cure the stagflation disease of the heart. Do your China self a favor and make imports cheaper for a change. In 2008 oil went to $140 per barrel with the watch dog on duty and no OPEC was acting up.

Feel sorry for the people who sit behind the CPA test. If there is pain, there is gain.

Next stop, ISM. Program LIFO.

There is one more issue that needs to be aired about the real estate sector in China. In China the Party literally owns all the land. When a developer 'buys' land from the government (usually local) they are actually buying a leasehold, not a freehold - to use familiar English terminology. These leases can be for anywhere from 70 to 99 years. Legal information on this is difficult to find.

The problem is that China is only 62 years old and none of these 'leaseholds' has yet come up for renewal. Nobody is certain how this will work when the deadlines approach. Will they be renewed? Will they be repossessed? Will there be a combination, and if so what will be the decision criteria? Consequently, buildings in China suffer from short-termism and the building quality seen in other countries is 'missing'.

While this will likely be good for the Chinese macroeconomy (it will keep capital recycling as buildings are knocked down and replaced) the implications for the microeconomy are uncertain.

Will buildings in China recoup their costs before their low quality construction makes them unusable or unsellable? The owner cannot sell off the land, only the remaining leasehold.

Title me an accountant. Economics and potentially ISM are secondary.

The best way to prevent a housing bubble burst in China is to squeeze out the investment interest, especially the oversea interest, from the housing market. To achieve that the property tax needs to be greatly increased, not on the third home, but on the first, and effectively cancel the property tax with an equally large homestead exemption. Local government should switch from relying on land sale income to property tax income.

I don't think the lack of perpetual land ownership is such a big deal, there are very few single family homes in big cities, and condo owners don't own land (or else I'm going to sell my 0.002 acre right under the reinforce column for $1 billion).

"Chinese banks have very high reserve ration 20% (they can only lend out 80% of customer saving)."

Really? I thought the reserve ratio is (long term deposit)/(outstanding loan).

I am just so glad to see one Chine-related article which was not posted by Bayan.

The inflation and housing price on peak are making people nervous. In my opinion, it is already at an alert level, but not yet to become a warning.

Yes. And Sub-prime was contained and a small portion of the bond market -- Ben Bernake

The Chinese banking system is going to have to be bailed out yet again as the banks accumulate non performing loans to large State Owned Enterprises. We are going to see consumption as % of GDP decline even further as Chinese citizens are forced to bailout banks via horrendously low interest rates on deposits.

China's authoritarian ways seem to be benefiting the country a lot when it comes to dealing with a potential property bust. The measures that China is taking to prevent a crisis - restricting mortgages taken out for investment purposes, and banning state-owned enterprises from buying land- would not be tolerated in a more liberal atmosphere, and that is perhaps what may save China from going down a similar path as other Western nations. In addition, what differentiates the case in China from the case in Dubai is that China has a sufficient use for all the building going up in their cities, whereas Dubai built up on the assumption that people would buy the property once it was built. Though there are more favorable conditions in China for preventing a property bust, the possibility that one will occur is still present, and China should be wary.

Where is the bubble? Would there be one if Beijing does what it says in controlling the seemingly overheated economy? Premier Wen has just reiterated the need and the priority effort to curb inflation.

If the chart reflects the actual scenario, then the ratio of house price to income in China is still reasonably stable and within reach of average wage earners, unlike the rocketing rise in Hong Kong and Singapore, or the already high values in the West. (btt1943)

The leasehold for residential properties is 75 years. This is more than enough time for a young adult to have a working life and raise a family until the children will be old enough to finish school and start their own homes. The leasehold will also allow him to retire in peace. Leaseholds for agriculture, commercial and industrial land is 30 years. This does seem rather short. But the government can always amend the law should that be necessary. No leases have matured yet.

Mao wiped out China's landlord class. After various experiments in land ownership including collective land ownership China came up with this "The State owns all the land" law the date and details of which I do not have hard details on. But this thought crossed my mind. Since the beginning of civilization every one of them eventually fell, excepting China's. Aside from loss of land fertility and therefore the ability to feed the people the other cause of demise is the every increasing disenfranchisement of land

Oops. Sent incomplete by mistake.....Aside from loss of land fertility and therefore the ability to feed the people the other cause of demise was the ever increasing disenfranchisement of the peasants. The nobels and the land owners accumulated more and more land until they became powerful enough to intimidate their sovereign and to oppress the peasantry. Under current Chinese land laws no one can accumulate large land estates assets that can be passed down as an inheritance. Therefore no landlord class will arise to bedevil the state at some future date. I think China has done something profound here.

to tell truth
Chinese believe owning a house is the most important thing after they can feed the family. Though there is significant financial difference in the loan policies, the cultural difference should have a big role in determining the final share of house ownership in China. Sometimes, simply cultural factors dominates other factors.

I don't quite understand the graph. It seems to suggest that China's housing is more affordable than other countries - which can't be true.

To the poster Huyu (Mar 7th 2011 1:31 GMT). Could you please moderate your language, your derision, and your anger? Most of your posts border on the abusive. If you cannot reason in a civilized manner then do not join the discussion.

No one is attacking the Chinese people, least of all the Economist. They are only assessing Chinese economic policy. The difference should be obvious. And if you must disagree with every article on China, then at least write with greater wit, wisdom being absent. Your language is uncouth.

Rama Ratnam