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China’s Real Estate Bubble Pointing to Global Recession?

The Washington Post has some dire words of warning on China’s real estate market:

As home prices have skyrocketed, many Chinese households have gone all in on real estate by pouring years of savings into buying as many homes as they can.

But as the country’s economy slows to its worst pace in years, China’s dependence on real estate for growth — it’s a bigger driver than even exports now — has put the government in a tough position.

Allow prices to continue rising and help the economy in the near-term, but the real estate bubble gets worse. Cool things off and the entire economy slackens too much.

The nightmare scenario, though, is a bubble that bursts. A major drop in prices would ripple through the Chinese economy and potentially the rest of the world. Real estate investment constituted 13 percent of the country’s gross domestic product last year. The sector feeds steel, concrete and dozens of other industries.

Meanwhile, the Asia Development Bank cut its growth forecast for Asia as a whole and China in particular for this year and next, driving home just how much the once-soaring Asian economies have slowed:

China’s manufacturing contraction persisted last month, Japanese industrial companies grew more pessimistic and South Korean exports fell, reports showed this week, signaling Asia’s biggest economies have yet to reverse their slowdowns. All of Asia’s eleven most-traded currencies except the Indonesian rupiah advanced against the dollar in the past three months as policy makers took steps to spur growth.

Combine this news with the worsening decline in Europe and signs of slow growth in Latin America, and the global outlook is not good. As Gerard Lyons, chief economist at Standard Chartered, writes, “Is the global economy heading into another recession? This is now becoming a genuine possibility, given events in recent months.”

We hope not, but despite some signs of hope here in the United States, the world economy has not yet found its footing.

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