Economics & Trade Policy

If They Build It, Who Will Come?


While much of the world continues to languish in a starting and stopping economic recovery, China’s impressive development and economic growth have proceeded with only the slightest of pauses.  Its 30-year track record and ability to maintain full speed ahead during the recent downturn have only solidified many observers’ opinions that China provides an example of effective government control and is destined to surpass the United States on the world stage in the coming decades—with its economy eclipsing America’s as early as 2016.

Despite the unbelievable success of the PRC’s initiatives, several problems still loom large for the East Asian giant.  Currently of great concern to Beijing is the rising inflation rate that has some investors starting to doubt the sure bet of the Chinese market.

Inflation has become a serious worry for many in China. In March inflation stood at 5.4 percent compared to the same time last year. This was driven in large part by soaring food and housing prices.  The first two months of 2011 saw food prices climb by 11 percent and housing costs jump by over 6 percent compared to 2010, according to the Chinese government.  This is terrible for a developing country desperately trying to be more consumer-driven because as these basic living expenses go up, people have increasingly less free income to purchase nonessential items.

Underlying the skyrocketing cost of homes is a deeper narrative about the housing market in China.  Many, both within and outside of China, worry the country is on the verge of an unprecedented housing bust.  Even though prices are going up, the demand isn’t necessarily there for the spacious high-rise apartments that account for nearly all of the country’s new housing.  Large portions of these homes are government initiatives designed to replace old, shabby dwellings throughout the country while also keeping employment and growth rates up by requiring and paying so many construction workers.  The government has even built entire new cities designed for millions of residents.  Currently, they sit as ghost towns.

Some estimates claim that as many as 64 million housing units are currently vacant throughout China.  That is enough to give one in every five Americans their own house or apartment.  While some of these remain unsold, real-estate speculators have purchased many of the empty units.  This is the driving factor behind the rising housing costs and also the reason many suspect a housing bubble burst is in China’s near future.

Currently, most Chinese, including college-educated and well-trained workers, can’t afford to live in the newer apartment complexes, and without them moving in, the chances of the bottom falling out of the market are great.  This is even truer since most citizens are spending more on food than before, further limiting their available income for purchasing a home.  If the bubble bursts, many within China’s new wealthy and upper-middle class are going to lose great deals of money, and the nation’s scorching economy is going to be seriously doused.

Over the past year, the Chinese central government has actively been attempting to curb inflation in an effort to head off any serious economic consequences.  This month saw the Central Bank raise interest rates for the fourth time since January and the tenth time over the past year.  In an additional step to cool the housing market specifically, at the beginning of the year the government approved a new tax on all purchases of second homes.  Beijing hopes this will limit some of the speculating that is keeping prices well above normal market price.

These are huge steps for a country that has long been consumed with value and growth, and they betray the leadership’s fears of what this could mean.  College graduates unable to buy a home might eventually feel the government has failed on their promises of a brighter future.  The new middle and upper classes would certainly feel that way if their investments in new homes suddenly become worthless in a housing crash.

Perhaps most importantly, the entire population could lose trust in the Communist Party if there was any kind of serious economic situation.  Beijing feels confident in its ability to weather many storms, but these are ones it desperately hopes to avoid.


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