17 Aug 2012

China's Housing Bubble fit to burst

Writing in Prospect Magazine (8.8.2012) Mark Kitto gives a vivid description of life in modern China. It seems the Chinese have caught afluenza. The name of the game for many is making money. Sixty years of communism and thirty of the one child policy have resulted in disconnected individualists who understand their worth in monetary terms and show it through conspicuous consumption.

Having bought all the symbols of status and success, what to do with the excess?  One has to be careful because as you get old you have to pay your own medical bills in China - so a safe investment with a reasonable return would be ideal. However Kitto tells us "The stock markets are rigged, the banks operate in a way that is non-commercial, and the yuan is still strictly non-convertible." While the very rich are able to squirrel their money offshore the remainder really only have one option: property. As in the UK house prices have become highly inflated, and new buyers cannot afford to get onto the ladder. Indeed Kitto remarks that "If you own a property you are more than likely to own at least three."
"The result is the biggest property bubble in history, which when it pops will sound like a thousand firework accidents."
Meanwhile on the Wall Street Journal's Market Watch website Andy Xie says "China’s land market will experience a dramatic adjustment ahead. In most cities, land prices may fall by 80%." He also notes that the one child policy will begin to have dramatic negative effects on the demand for property as population begins to fall. This is similar to the problem we have in the west with the decline of the Baby Boomer generation (See Role of Demographics).

Kitto fears what will happen when the bubbles bursts because so much of people's savings for old age is tied up in property. A large number of people stand to lose everything. And there is no social welfare and one child per family means. The new middle class are very vulnerable. Kitto envisages large social unrest.

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Keep is seemly & on-topic. Thanks.