It is 3 years since this blog predicted the onset of the greatest financial and economic calamity since the Great Depression. Since then the global economy has been gripped in a crisis now termed the Great Recession, which has decimated stock markets and real estate values and made millions unemployed. Lately our leaders tell us that the worst is over and that a tentative recovery is under way. Alas, it is not over.
Leading the supposed recovery is China, the only major economy to not only avoid recession but achieve very high levels of growth (approaching +10% GDP) during the economic crisis. China’s growth is vital to all. Its market is large enough that its momentum could pull other major economies out of their downward spiral. However, a closer look at how China achieved its recent growth spurt reveals that it cannot last.
In response to the global financial crisis, the Communist government of China delivered the world’s largest stimulus package: a massive programme of infrastructure building and credit availability. In one sense it worked; China went to work building and investing all over the country at faster than ever levels. But it was the nature of the investment that failed.
As always happens when a central bank makes credit too cheap, malinvestments abounded. Speculative money flooded into the Chinese property market and house prices exploded, doubling and tripling in a single year. China built cities it didn’t need, set record prices for apartments, and queued around the block to buy residential property off plans. It all sounds so familiar. China today looks like Ireland did in 2004.
Much is made of China’s unique economic strength. Of its demographics and burgeoning middle class. Of its rise to become the world’s largest exporter and third largest economy, and of its inexorable rise to becoming a global superpower. I have been to China and I agree, it is dazzling in scale. Overwhelming in its industrial capacity. And remarkable in its rate of progress. One day I am sure it will take its place as the world’s largest economy. But it must still deal with economic gravity. This time it is not different. China’s property bubble will burst.
When it does the world is in for a shock. China will experience its own credit crisis and its banks will be devastated. The global economy will lose its primary source of upward momentum, and will sink back into recession. Far from saving the world economy, China will lead it into the second downward leg of the Great Recession. And next time around, we’re going to be running out of miracle economies to save us.
The one thing I will refrain from doing is timing the bursting of the Chinese property bubble. Though its implosion is certain, its date is much harder to predict. As we have learned from experience at home asset bubbles can continue for far longer than reason would predict, especially when those controlling the levers have a vested interest in it continuing. The Chinese property bubble, already at deluded heights, could burst next month or it could take years. I suspect there is still much more capacity for borrowing among the Chinese population, and their appetite for credit does not appear to be waning. But as we have seen before, the longer it goes on, the worse the eventual fallout will be.
Tags: assets, bubble, china, credit, depression, economics, global, property, recession
