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Bubble, Bubble, Toil and Trouble?

Construction has been one of the main drivers of China’s economic growth, responsible for roughly 15 percent of GDP in recent years. But as the Financial Times notes, China’s housing market has two faces: a frothy bubble in the biggest cities, where house prices are out of reach for all but the wealthiest Chinese, and hangover and excess supply in much of the rest of the country, where developers have been forced to cut back on new projects.

The two-speed nature of the housing market is a nettlesome policy dilemma for the Chinese government:

“Policy makers target the very expensive cities, but these cities account for only about a quarter of national sales volume and the crackdown on them has a nationwide impact,” said Rosealea Yao of GK Dragonomics, a research firm…

Aware of the dangers, the central government has started to loosen its reins ever so slightly. It has encouraged banks to offer discounts on mortgages to first-time home buyers and has prodded developers to increase construction of cheaper homes.

This pattern—price deterioration in more marginal areas while prices continue to shoot up in the hot spots—isn’t unique to China; it is frequently witnessed in the later stages of a bubble. As the American property market cratered in 2007 and 2008, certain areas like the Midwest, the South, and Las Vegas began to experience sharp price declines even as prices in other parts of the country, such as Manhattan, Washington DC, and San Francisco, were still rising sharply.

Focused government policy can keep the bottom from dropping out for some time, but often at the cost of a longer slowdown when it finally comes. Last fall, on a visit to northeastern China, I passed tower after tower of unoccupied residential property. Empty 18-story apartment buildings stretched for miles. That didn’t strike me as a good sign, but everybody told me I didn’t understand China’s special circumstances.

That could be true. The world has never seen anything like the contemporary Chinese economy, so nobody, including Chinese regulators and officials, really knows what will come next.

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  • Kansas Scott

    I saw the same empty apartment buildings taking the bullet train from Shanghai to Beijing in March. I’d love to know what “China’s special circumstances” are that make those a good thing. Maybe they think there’s a big market in providing sets for movies of some apocalyptic future.

  • Luke Lea

    “The world has never seen anything like the contemporary Chinese economy . . .”

    But then the world had never seen anything like the Great Leap Forward, either.

    In the late 1950’s Khrushchev predicted the old Soviet Union would “bury” the U.S. economy. On paper it looked like they might. But in the final analysis an economy that doesn’t know how to allocate capital efficiently is bound to fail. What we see in China is waste on a gigantic scale. The hard-earned savings of the working classes are going up in smoke. You can’t repeal the laws of economics, not even if you sit on the Standing Committee of the Politburo.

  • Angel Martin

    i think that “China’s special circumstances” is just a new vocabulary for “this time it is different”…

  • Kris

    “Sit on the Standing Committee”?

    [No, I have nothing serious to contribute.]

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