Chinese Real Estate Bubble: Global Concern By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran


Property sector in China is one of the biggest in the world and has trillions of dollars invested both from internal savings and foreign borrowings. Property investment has grown to account for about 13 percent of gross domestic product roughly double the US share which it had at the height of the bubble in 2007. When we add the related sectors such as steel, cement and other construction materials it becomes 16 percent of GDP. Property sector accounts for about a third of fixed asset investment. It accounts for about a fifth of commercial bank loans but is used as collateral in at least two fifths of total lending.

What is the situation now? China’s property sector is grossly overbuilt. This includes infrastructure, commercial as well as residential and the slowdown of demand is visible. Demands as well as prices have started falling. Question now is whether like in the US, will China do quantitative easing to revive the demand and if so how this will be done. Already tightening of credit terms including funding costs for property developers especially in the shadow of banking sector is taking its toll. The rate of return and cash flows for developers and local government have been deteriorating.

What is the ideal inventory level? While any excess property adds up to the holding inventory cost the latest data provided by the Chinese government shows that the inventory level varies anywhere between 7 to 24 months of demand. This is trillions of dollars locked up money.

The fallout of this crisis will be global. The real estate burst and its impact has always been the same everywhere. If happened in Japan, UK and the US to name a few countries. When the burst, if and when it happens, China will face a severe deflationary trends pushing down their GDP drastically. Other countries should be watching the development with great seriousness since the spillover effect is not easily measurable. For India, we are also seeing slowdown in the real estate sector. The situation is the same overbuilding. It appears that we cannot avoid business cycles and we need to grin and bear it.

The questions to ask are

  1. The impending slowdown in China. Will it have a contagion effect?
  2. Will it drag other countries into a recession like what the US did in 2008?
  3. When China slows down with Europe hardly recovering Japan and US having below 1 percent growth. What growth can we expect for the global economy for 2014-2015?

 

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