There’s No Easy Way Out for China from its Real Estate Bubble

Chinese living in ramshackle homes having a meal in front of newly constructed and half completed buildings (Source: MarketWatch)

The burst of a bubble in the real estate sector is one of the most difficult to get out of for any economy. This is true even in highly regulated economies with real estate sector making up less than 15% of their GDP. In China’s case, the real estate sector makes up nearly 30% of its GDP if we include allied industries, and is highly leveraged.

The massive size and excessive leverage of the Chinese real estate sector makes it very difficult for the Chinese govt, with all its resources, to prevent the bubble from bursting. Even if they can contain the bubble, the impact will surely be felt on other sectors of the economy, with investor confidence and consumer spending plummeting.

The average Chinese consumer has a high exposure to the leverage real estate developers in China have taken. Also, the Chinese public have over 70% of their wealth tied to property. And the Chinese financial markets have many financial products exposed to the real estate sector totaling $3 trillion, which consumers have subscribed to.

Even if the Chinese central bank can inject liquidity and do the bailouts to their whopping $55 trillion real estate market, the bubble will still hit other parts of the Chinese economy. Services and manufacturing tied to the real estate sector will take a hit leading to a cascade of events ending with low consumer spending and foreign investors pulling out their capital.

The end of such a real estate sector bubble should lead to the stagnation of the Chinese economy at best, and this is where it is heading.

And it will be the end of the Chinese growth story at least for some years to come. But the story may not end there. The Chinese government, the CCP, has for all these years sold economic prosperity and growth to its people for unchallenged power. When the economy stagnates, and people lose their wealth, the public may not be pleased.

My opinion is the CCP knows what’s coming. And it is preparing for this in the name of “common prosperity” and also getting ready militarily. They already have experience redistributing wealth snatching it from the wealthy during the time of Mao. By calling it a “reform” back then, the communist leadership managed to blame the landlords for their policy failures and got the impoverished masses to back them by redistributing land and money taken from the rich.

Common prosperity sounds something similar to Mao era’s leaps, revolutions and reforms to keep the masses contended as Chinese economy grapples without healthy economic drivers. This means, like landlords of the past, the rich and capitalists of China are in for some tough times soon. But so are its neighbors, like India and Taiwan. As the CCP may stir up arbitrary military conflicts to be used as “the people’s struggle” to hold power back in Beijing for the communist regime.

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A blogs a worldview at ablogs.medium.com

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