China Law Blog

Residential and commercial real estate oversupply, in addition to the persistent and ongoing stock market fall, will cause a world of pain. So much of China's GDP growth is investment-linked, and industries such as steel and cement are major drivers (construction/ infrastructure linked). The adjustment won't be comparable to the US downturn, it will be much worse and thanks to overoptimism and incomplete information/analysis /understanding far less well anticipated.

A strong enough slowdown in China will indeed promote policy adjustment, including a possible return to liberal reform. However, the govt's response to inflation demonstrates that the reflex for planning and control, not liberalization, still prevails.

I predict that it will tank so far that no one will want to touch it whether they are Chinese or not.

@JD,

"The adjustment won't be comparable to the US downturn, it will be much worse and thanks to overoptimism and incomplete information/analysis /understanding far less well anticipated."

I think you're way, way too pessimistic. Chinese government's fiscal situation is among the strongest in the world. Chinese people are big savers and most of their savings are in the banks, not in the stock market. Stock market in China has never been strongly correlated with the economic growth. Real estate is overheated and a lot of speculating investors will lose their investments, but there are plenty of Chinese waiting to get in once the price falls back to the reasonable level due to the "demographic dividend" and the unprecedented scale of urbanization process the World has ever experienced in the next decade. Export is slowing, but still grows at 20+% with large surplus.

With such strong fundamentals, it's very hard to be pessimistic.

"A strong enough slowdown in China will indeed promote policy adjustment, including a possible return to liberal reform. However, the govt's response to inflation demonstrates that the reflex for planning and control, not liberalization, still prevails."

These kinds of statements and predictions sound so familiar in the last two decades. In the old days, it was the "old guards" vs reformers; later it was "hard-liners" vs "liberals." You would think after thirty years of market-oriented reforms and many up-and-downs in the economy, the Chinese government would know something about how to manage their economy without always being accused of reverting back to "central planning" whenever there is a chance.

I mean, inflation? It is at 7-8%, but is nothing compared with the late '80s and the 24% in 1994. Economic downturn? It was bleak back in '97-'98 during the Asian financial crisis when Chinese grew at barely above 7% a year. Remember back in the old days (of 7, 8 years ago), the dire predictions of China's SOE (state-owned enterprise) and the virtually bankrupted Chinese banks? Today almost every aspect of the economy: government fiscal position, current account, corporation and financial systems, are in so much better status than it was ten years ago it is hard to understand where the pessimism comes from.

I've been watching the retail sector very closely and there's a lot of smoke and mirrors and empty luxury joints. I predict straight after the Limpics that retail space will be available for pennies. I also anticipate residential to plummet.

So. It's on record.

I have been afraid of a correction in the Chinese real estate market for a long time and here's why. With the real estate market exploding as it has done in past years, Chinese people will often buy a condo strictly as an investment. By that I mean they don't even get the place finished and rented out. Rather, they just hold onto it, and flip it a few years later. The scary thing about this is that when the real estate market starts to dip a bit, people get scared and start selling their property. This hurts a market even when there isn't an overabundance of property being held for investment. But when you have a situation where you have far more units on the market than could possibly be filled, and prices are already dipping, it is a recipe for a dramatic downturn in real estate value. If you own property in China, this might be the time to take your winnings and get out.