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Don't Bet on China's Real Estate Bubble Bursting as Beijing Remains in Control

Don't Bet on China's Real Estate Bubble Bursting as Beijing Remains in Control

The international media and so-called global analysts have been predicting the end of China's runaway growth for the past four years - all because Beijing's predicted 9 percent to 10 percent gross domestic product growth has fallen to 8.1 percent.

That's still among the highest in the world.  By comparison, the U.S. GDP this year is predicted at 2.1 percent, one of the lowest in the last 10 years.

Still, the doom-and-gloomers are chortling because:

  • Property developers in China are currently selling their inventory at a 40 percent to 50 percent discount.
  • Large new residential construction projects have resulted in an estimated 60 million unoccupied apartments.
  • Twenty million farm residents have moved to the cities.
  • Demand for housing is fierce but purchasing a home requires a 30 percent to 50 percent cash down payment.

What the critics forget to mention is that China can spend its way out of any slump. The government owns all of the land in China.

In 2008, for example, Beijing laid out a $600 billion stimulus plan - with no jockeying by special interests or political lobbyists as happened in the U.S. with a comparable project.


There are no special interests or political lobbyists in China. Another Beijing stimulus plan is in the works, according to recent outside speculation.

Jonathan Levine, a lecturer of American Studies and English at Tsinghua University in Beijing, presents further ammunition on why China's housing bubble will have a soft, not a hard landing.

Writing in The National Interest online publication, Levine notes "The American bubble was propelled primarily by private development, whereas the Chinese bubble has been driven primarily by public development.

"A considerable amount of China's GDP is the result of state construction. Party secretaries and provincial governors are given essentially arbitrary GDP targets for their jurisdictions, and large construction projects are an easy way to artificially boost output."

Levine concedes that "while public-sector largesse has led to as many as 60 million unoccupied apartments and a few other embarrassments, it demonstrates the ability of China's central planners to control supply and perhaps influence demand.

For example, he states, "Unoccupied homes in Florida continue to depress surrounding local neighborhoods because their very existence creates an excess of supply. The same situation in China would be a non-issue. The government would simply demolish the unoccupied homes--like erasing a mistake on a piece of paper."

Levine argues Chinese workers save more of their paychecks than Americans and that is the crucial difference with the housing bubbles in both countries. That is also another reason China's housing downturn won't compare with the U.S. debacle.

"In 2006, at the height of the bubble, the U.S. savings rate pushed the outer limits of leverage and fell into negative territory," Levine notes.

"America's pervasive culture of consumerism, debt and spending was the principal catalyst for all that followed--the first domino.

"Had Americans had more savings and more home equity during the downturn, more loans could have been serviced and fewer homes foreclosed.

"Fewer foreclosures would have preserved the integrity of the collateralized mortgage obligations, essentially large pools of home loans, which would have further stemmed the avalanche of credit-default swap payments to investors betting against mortgage holders."

Chinese workers today may not be spending as much as Beijing would like them to do on domestic products, but that savings mode will be what will save China's housing market.

On comparing the savings rates in the U.S. and China, Levine points out, "The situation in China over the last decade has been almost comically reversed.

"Throughout the 2000s, the Chinese savings rate increased, topping out at 38 percent in 2010, one of the highest in the world.

"Those subprime NINJA (No Income, No Job, No Assets) loans that were all too common in the United States during the boom years would be unthinkable in China, where buyers are required to pay as much as 50 percent of the asking price up front."

The professor concludes: "When the chickens come home to roost, the blow will not be mortal because the Chinese will be equipped with enough personal equity to weather the downturn, and the banks will not be overextended." 

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