For some years now, economists around the world have been debating whether or not there is a real estate bubble in China, that is, a phenomenon of unsustainable increase in house prices, destined to collapse and cause serious damage to the economy. China is the second largest economy in the world, after the United States, and the real estate sector is fundamental: it is worth approx a quarter of all the economic production of the country. If the real estate market were to collapse drastically, therefore, it could put the entire Chinese economy at risk, and consequently the global one: as happened in the United States in 2008, when the bursting of a housing bubble caused the most serious global financial crisis since the war. .
After a decisive and progressive increase in real estate investments and construction sites that began over ten years ago on the impulse of heavy financing and concessions from the Chinese government, the country now finds itself with a considerable surplus of houses and with widespread building speculations. Beginning in the middle of the last decade, the Chinese government had to seek solutions to correct the disproportionate expansion of the real estate sector, reversing the direction of the measures taken in previous years to straighten what appeared to be an unsustainable increase in the national economy and prevent the bubble. real estate broke out. Doing so without dangerously slowing down economic growth, however, is not easy: for now the operation seems successful, but the market is now full of distortions and rigidity, and there are still many unknowns.
Many economists, over time, have indeed exposed themselves by claiming that the collapse was imminent, but for now they have always been denied. This continuous postponement of an apparently heralded crisis has given rise to two opposing orientations among experts dealing with China. The first is that the crisis is inevitable, and that it will come sooner or later, as the great increase in prices, the growing rate of debt and numerous speculation phenomena seem to show. The second orientation is that the authoritarian Chinese government, which has so far used several rather ingenious methods to prevent the bubble from bursting, will succeed thanks to heavy state intervention where the liberal governments of the West have failed. The latter hypothesis also has political implications, at a time when Chinese President Xi Jinping proposes his country and his style of government as a “model” for the world.
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According to economists, China’s real estate bubble began with the 2008 financial crisis, when the government decided to support the economy with a measure in many ways opposite to those adopted by Western governments. An economic stimulus of 4 trillion yuan was approved, which at today’s exchange rate is about 500 billion euros, or 15 percent of all the country’s GDP. At the same time, the People’s Bank of China (PBOC), the central bank, lowered interest rates massively, taking them from around 4 percent in June 2008 to 1 percent in early 2009. The the idea was to inject a lot of liquidity into the economy and to lower the cost of borrowing, to keep investments high and protect employment.
The measures worked: in 2009 the economy grew by 9.4 percent and in 2010 by 10.6 percent, while all the other major economies in the rest of the world collapsed. Much of the growth was achieved through huge investments in infrastructure and real estate: in 2009 alone, home sales increased by 67 percent, and more generally real estate became the focus of most of those growth policies. years thanks to several factors.
Among these, simplifying: government policies to encourage buying and selling, such as lowering the cash advances needed to buy a house; the low rates that made it cheap to borrow; the fact that land in China is owned by the government, which also made it very convenient for local politics to approve new building projects; the widespread corruption in those years. Finally, the fact that the promotions of local politicians depended on their ability to foster economic growth: and the massive development of the real estate sector, under certain conditions, guarantees high levels of growth.
Starting from those years, important speculation phenomena related to the real estate sector took place in China, well represented by the so-called ghost towns: large complexes of houses and buildings built for speculative purposes but never inhabited or in any case underused. According to an estimate contained in the book China: The Bubble That Never Pops, released late last year and written by the journalist of Bloomberg Thomas Orlik, in China right now there are so many empty apartments that could house the entire population of Canada, which amounts to nearly 40 million people. According to other estimates, like that reported dall’Economistone fifth of all homes in China are empty.
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As early as 2010, the Chinese government had understood that the economy was “overheating”, that is, that the growth cycle was becoming unsustainable, also due to the real estate sector, and had applied some measures to try to slow down speculation. Among other things, he had raised interest rates and increased the value of the cash advances needed to buy a house. But at this point a serious dilemma typical of these situations arose, because the real estate sector had become so important that slowing its expansion would have meant damaging the whole economy. In China, maintaining a good level of economic growth is essential because according to experts, legitimacy in the eyes of the people of the Communist Party that governs the country depends on it.
For years, economists have been betting that the Chinese government would not be able to balance these two conflicting priorities: deflate the reckless expansion of the real estate sector (and, more generally, straighten an economy whose growth was unsustainable because it was very dependent on stimuli from the government) and at the same time keep growth high. But despite the alarms about an imminent burst of the Chinese housing bubble (here the Wall Street Journal in 2016, for example), never happened.
Come he told l’Economist, the current situation is still very risky: since 2010 house prices in the main cities of the country, which are defined as “first level”, such as Beijing, Shanghai and Shenzhen, have practically doubled (the increases are smaller but still consistent in second and third tier cities) and are among the highest in the world. Speculation is still very strong: how he told the Wall Street Journal a few months ago, a lot of 288 apartments in Shenzhen was sold in 8 minutes in March. In Shanghai and Hangzhou, he wrote theEconomist, local governments organized random draws to assign homes for sale in the best neighborhoods.
General indebtedness, both of buyers and builders, has risen substantially, and the level of investment in the sector is higher than that of Japan in the early 1990s, when the bursting of a huge housing bubble, together with a more general crisis, caused a long economic stagnation from which the country has not yet recovered.
L’Economist however, he notes that the situation is much more complex than it appears, and that the government has put in place numerous seemingly effective measures to balance the real estate sector without damaging growth too much. In 2017, President Xi Jinping introduced a new slogan that more or less can be translated as: “Houses are for living in, not for speculation” and which has been very present throughout the world ever since. official propaganda.
Many cities have also imposed significant restrictions on buying and selling, such as the aforementioned lotteries, while others have issued new rules that effectively prohibit families from buying second homes. In the middle of last year, the government also inaugurated a new policy of “three red lines»To prevent building contractors from getting into debt beyond their means (it is so called because it provides for three debt control criteria), and in the following months it adopted other measures to check credit.
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The government is also adopting policies to encourage more and more citizens to go and live in “second and third level” cities, also thanks to thehukou, a decades-old system that links the provision of public services and even certain rights to the place of birth (children born outside Beijing, for example, as a rule would not be able to attend the city’s public schools, andhukou also regulates house purchases, albeit with wide exceptions). Building contractors are also starting to do more and more projects outside the bigger and richer cities.
There are enormous difficulties, because very invasive government intervention risks making the market rigid and full of distortions. For example, due to the many rules, in many areas newly built houses cost less than already inhabited ones offered for sale. In general, though, house prices have been stagnating for some time, and the China Index Academy, the country’s largest independent real estate research center, believes sales are expected to drop by four percent over the next five years. year, after double-digit increases in the past decade.
This means that, at least in appearance, the Chinese government’s interventions are having success in deflating the alleged housing bubble gradually, avoiding sudden collapses. It also means that the sector, as a growth factor, could become a burden on the economy, and therefore new ideas will be needed to keep the growth rate high.
This optimistic thesis is not shared by all economists. Many note that so far virtually no one has ever managed to deflate a housing bubble without bursting it, and remember that in the 1990s the ingenious measures of the Japanese government were praised exactly as they do today with the Chinese one, but this did not prevent Japan from being hit by severe stagnation. This would mean that the crisis, rather than averted, would only be postponed.
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