China and its Bubble: Why it might be a matter of wrong timing

Bubbles are made up by people and it purely depends on the people who blow them on how big they become before they burst. But what if the bubble turns out to be actually a balloon that can rise and fly up to the skies? Well the answer for that lies in the future. Over the last 2 years, we have seen doomsday predictions of analysts calling for China’s bubble to burst. Many expected that in 2010, then pushed it back to 2011, and now they are saying it might come later. But all along they have thought of China’s economy as a bubble, and since bubbles are meant to burst, many used the same principles of economics into analysing its economy.

While a country’s economy might be similar in terms of its principles (supply and demand, unemployment factors etc.), one has to realize that timing and how the world revolves plays a part as well. The main factors in people pushing for China’s economy to peak and suddenly fall lies in its property bubble which many analysts say mirrors the United States’ property bubble in the decade leading to 2008. They mention the low occupancy rates of new satellite towns, luxury skyscrapers in Shanghai, and how the city centre apartments in Beijing is beyond the reach of mass consumer market.

But how true is the GDP per capita which is stated? And what about the ever burgeoning middle classes? Stated GDP per capita in China is less than $10,000 in urban areas and perhaps even as low as $2,000 per capita in the impoverished hinterlands. I won’t dispute these statistics, but look at the number of millionaires and billionaires in China. They number in the tens of thousands. Add to that mix overseas Chinese from Taiwan and Hong Kong, and the number grows two to three times over. Add in the ones in surrounding South East Asian nations like Malaysia, Singapore, Indonesia and Thailand and the number grows even more. This is a huge number which contributes significantly to buyers of private apartments in Shanghai and Beijing, who buy them for investments. There are again Taiwanese and Hong Kong entrepreneurs who have purchased lodging for themselves since they have business in these major cities. Now that is perhaps why one don’t always see occupied apartments at night.

Provincial government debts comes into play in the next chapter. While it is true that provincial governments have pushed for a lot of construction and is burdened with debt, but as the ever increasing prices of land and continued foreign investment enters the nation, would there be any difficulty in covering up payments for these debts? Credit-heavy does not necessarily point to collapse, as long as funds continue to flow in. There have been news of ever increasing rents in commercial spaces in China and overseas companies like Wal-mart and Carrefour are now looking to purchase land and build their own hypermarts. Foreign direct investment is still flowing and then as of last week, Nestle is looking to buy Singapore-listed, Taiwan-owned, China-operated candy maker, Hsu Fu Chi in a deal exceeding a billion. Now you have M&A activity that is growing in the country. This naturally just creates more liquidity that only fuels a bubble. And I am not even counting the number of small and medium enterprises getting funding from listing in overseas stock exchanges like Toronto and New York.

So the bubble is just growing and getting bigger before it pops? That’s where I think this bubble might become a balloon and maybe become a nice addition to the world economy. Porsche have mentioned its staggering rise in sales, all contributed in part to sales of Cayennes in China, and Aston Martin is going big in that country. The rich are still spending, and in the process they will create more investment in the country and create a smooth flow of money that will eventually trickle down to increase the population of the middle class. The latest Beijing to Shanghai high speed rail creates demand for local tourism and one can now travel around the coastal regions virtually by comfortable high-speed rail, in addition to excellent highway routes. The country has created a world-class infrastructure system that can cater to any business and leisure traveller, while at the same time showing its dedication to move its legal and administration system to a more modern standard (such as allowing ownership of properties). These show that the country is adapting to its newfound economic importance. Starwood Hotels is placing such emphasis on China that its CEO will tour its operated hotels in the country and aims to have more hotel rooms in China that the United States. Domestic Chinese companies building roadside and suburbia motels as well as online ticketing agencies like Ctrip.com has had huge success showing the amount of travelling done by locals.

Economic growth ultimately grows bubbles but if the bubble is predicted at a time when economic growth is still at its nascent stages, then that prediction will just wade off in the distance. The potential for growth in China is still there and it is only until the whole of China becomes perhaps as developed as the United States when any further growth is difficult to be squeezed out of that high property prices can start to look like a bubble. And in that sense, I think China still has a long way for economic growth and the only reason its economic growth might be destabilized is due to a massive revolution against the Communist Party or heaven forbid, a third World War.

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