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Will China break?   [Copy link] 中文

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Post time 2011-12-20 17:24:51 |Display all floors
Many financial experts believe that Chinese real estate bubble burst is just a matter of time. But will China follow the steps of Japan and US to get into a recession, as Paul Crugman describes? Anyway, it is the last thing that world economy wants.
Will China break?
By PAUL KRUGMANConsider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now.

Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, we are: as the consumer share of the economy declined, China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?
Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.

To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.

For what it’s worth, statements about economic policy from Chinese officials don’t strike me as being especially clear-headed. In particular, the way China has been lashing out at foreigners — among other things, imposing a punitive tariff on imports of U.S.-made autos that will do nothing to help its economy but will help poison trade relations — does not sound like a mature government that knows what it’s doing.

And anecdotal evidence suggests that while China’s government may not be constrained by rule of law, it is constrained by pervasive corruption, which means that what actually happens at the local level may bear little resemblance to what is ordered in Beijing.

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

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Post time 2011-12-20 21:24:59 |Display all floors
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Roach Exterminator

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Post time 2011-12-21 01:29:33 |Display all floors
Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?

This is actually the point where Krugman starts to mess up things (as he often does - IMHO he's totally overrated as an economist, the US has far better ones). Japan and especially the US had open capital market, so when prices were declining, investors could escape into various other sectors - which they did.
In the case of China, you can only escape to cash. Gold isn't an option (highly taxes), other commodities neither, foreign exchange is also risky as it can't be hedged and the local economy is, due to the very small amoun of consumption, not appealing at all. So the dominant strategy is to hold real estate even if prices decline slowly.

What's more is that prices are only decling due to strong government measures that even forbid people to buy appartments inspite of the inflation. So as long as inflation is high, there will be lots of demand for real estate.

Thus, I don't think the bubble is bursting now. Not yet. I believe it will burst some day - but not now yet. Wait a few more years. And, if you are Chinese, diversify your investments into foreign currencies (which are very cheap right now anyway, especially Euro) and perhaps certain commodities (this sector is harder).

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Post time 2011-12-21 02:03:04 |Display all floors
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Post time 2011-12-21 03:00:24 |Display all floors
While regular elections in the west, i feel, tend to promote short term results because officials need to worry about reelection.

This is indeed an important point. For instance, G.W. Bush started an ambitious NASA project (constellation), lots of money was spent on it and when Obama came to power, he kicked it all out and started his own space project (which ended in a disaster - the USA are no longer capable of bringing people to space).

The same applies for the financial politics, which are too abstract for people to understand and therefore have very few influence on election results, whilst the economic performance is crucial to the result. Thus, presidents have a strong incentive to increase public debts.

However, the system in China has a diffrent problem - the principal-agent problem. The Chinese leaders, while having a long-term perspectives (just like kings had in ancient Europe) mainly take care of their own well-being, putting the people second. This leads to the problem that there are many poor people in China, inspite of the fact that China is now relatively well off.

I'd therefore suggest direct democracy as a solution. People tend to have a long term perspective and don't necessarily want to increase public debts. Moreover, legal decisions backed by the people are very hard to be changed by politicians, thus this system would lead to a long term perspective and lasting wealth for a country.

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Post time 2011-12-21 05:24:34 |Display all floors
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Post time 2011-12-21 06:56:39 |Display all floors
masses are too easily manipulated and cannot be relied upon to make every decision an administrative government

It's harder to manipulated the masses than to lobby in congress... so I guess it'd still be better than the current short-sighted defacto ruling of corporate america.
There is already direct democracy in many states, including some large ones like california, so why can't there be on a national scale?

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