With much of the world’s economies seeing either slow growth or even a decline in GDP last year, China has officially announced 8.7% growth for 2009. Guangdong outperformed the Chinese average reaching 9.5%. Though still impressive it is nonetheless a set back to an economy that has been used to double digit growth for decades and shows that China was significantly impacted. Much of the decline can be blamed on exports which have contracted by 16.2% compared to the previous year. While still contracting, imports fell only 11.2% for 2009 but have skyrocketed +56% in December while at the same time exports grew 18%. This was the first time in over a year that trade data has turned positive. Recent trade data indicates the economic momentum has managed to detach itself to a certain degree from its export dependence and has now shifted toward the domestic economy.
During this process fears of a bubble economy have been persistent. The stimulus package has unleashed enormous funds in infrastructure projects and policies to boost consumption. Most notably loose monetary policies have flushed ever more cash into the economy. Monetary policy with low interest rates and easing banks’ access to money can be a powerful tool to boost an economy. But as a saying goes, you can take a horse to water but you can't make it drink. As for China, that horse is drinking and it seems to be very thirsty. As a consequence domestic consumption has risen by nearly 15% in 2009, and the real estate and stock market are both booming. This has now become a major headache for policy makers.
It seems real estate prices have become the biggest concern and regulators have communicated warnings to curb extensive lending. Raising real estate prices in major cities and speculative investment activity certainly are things to worry about. However, this situation cannot be compared to similar bubbles in Japan and recently in the US. Higher standards of living for some segments of the population increase the demand for luxury housing, and fresh influx of workers from inner regions also have boosted housing demand. At this point China is still experiencing a catch-up phase where access to housing meeting the new lifestyle is a challenge.
Policy makers are right to address some bubble fears. Investments that are fueled by bad loans are dangerous, making tight regulation and transparency for loans necessary. If the boom is based on quality loans and purchasers with sufficient buying power, the growth can be healthy. When talking about a bubble in China, it might also be helpful to divide China into pieces: the rich and the poor areas. In certain cities along the coast, in the PRD, Shanghai, Beijing there might be a bubble in certain market segments, say the luxury housing market, while at the same time in other areas of the country real estate prices have been developing more modest. Focusing on rebalancing the national economy and fighting economic differences throughout the country might be the bigger issue.
Max J. Zenglein
German Chamber of Commerce – South China
