Harmonious Development?
There
is a growing body of evidence to suggest that China's economy is
beginning to slow down amid political changes. 'Harmonious
development' could be facing its biggest challenges yet. only months
after Wen Jiabao, China's now ex prime minister, set a growth target
of just 7.5% for 2012 – 0.5% lower than the 8% annual growth
figure; a figure which has only been compromised in 1998 and 1999
during the Asian financial crisis.
Growth
rate forecasts have often been conservative, with many of them easily
surpassed, with average GDP growth rates averaging at 10% in the
years 1978-2004. However, in his penultimate speech as prime minister
March 5th
of this year, Mr. Wen spoke of 'new problems' that threatened Chinese
growth. These include rising consumer prices and the emergence of
what some have called a 'property bubble', characterised by a
tripling in average Chinese house prices in the years 2005-2009.
Property Bubble
Since
Chinese citizens were first permitted to own their own properties in
the 1990s, there has been a marked property boom, instigated by
financial and monetary policy de-regulation, allowing for ease of
speculation and investment. Chinese investors, attracted by the
promise of large returns flocked in their droves to the real estate
market.
The
housing boom China has experienced holds many similarities to that of
the West's, which was sent crashing and stagnating post-2007 amid
'reckless credit
expansion, huge trade deficits and asset bubbles'. Investors began
buying up housing contracts from contractors whilst anticipating a
continuing rise in prices, but once supply significantly outstripped
demand, the bubble was sure to burst, sending house prices
spiralling. On average, one billion square metres of real estate were
built during the bubble's peak years, three-hundred million more than
the amount needed to accommodate new owners, not counting those who
would potentially inhabit the several million already vacant units.
A
sizeable portion of Chinese GDP growth had included the successes of
real estate investors and the booming prices real estate commanded.
However, as the real estate market becomes less attractive to
investors, who are expected to see losses of as much as ~30% on their
investments if entered back onto the market, Professor Patrick
Chovanec expects that if property investment plateaus, as much as
2.6% of real GDP growth could be subtracted from annual growth; a 10%
fall in could see GDP growth fall to 5.3%.
Professor
Chovanec's predictions are worrying for a country desperate to avoid
repeating Japan's asset bubble burst of the '90s, however his
observations show a -9.1% drop in overall property investment versus
figures from last year (May 2011 vs. April 2012). Chovanec's
observations denote a contraction of one of China's main sources of
GDP growth; a contraction that threatens to worsen as 2012 sees a
marked decline land sales and foreign investment in Chinese property
development.
Wen
Jiabao's admission of 'new problems' that threaten Chinese future
growth, point to an uncertain future for Chinese policy-makers. These
uncertainties will have to be balanced and managed by Xi Jingping the
party's new general secretary as of November 15th. He has
the unenviable task of foreseeing China's continued economic growth,
keeping a semblance of social stability and managing the rising
influences of interest groups which hold an increasingly high stake
in the continuing growth of the Chinese economy.
Global
Outlook
However,
despite its slowdown due in part to aforementioned indicators, many
hold that China will continue to be the fastest growing of the large
industrial economies this year. The economic outlook in the West is
decidedly bleak in comparison. On the same day Xi Jingping was
unveiled as general secretary, it was announced that the euro zone
debt crisis had pulled the area into its second recession since 2009
in Q3. Mario Draghi, President of the European Central Bank,
meanwhile maintains that the ECB are keeping a watchful eye over euro
zone countries as inflation is carefully monitored and expected to
remain at 2% throughout 2012.
- Michael John Cass @michaeljohncass
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