China's Boom May Be Building Toward a Bust
Some economists say the runaway housing market reflects a bigger problem: an economy starting to spin out of control.
By Tyler Marshall and Mark Magnier, Times Staff Writers
BEIJING — Feng Yong knows the capital's white-hot real estate market is inflated. That didn't stop the 26-year-old English teacher from paying 15 times his annual salary for a small two-bedroom apartment near the city's Olympic Village site.
"Like everyone in Beijing, my big dream was to own a place of my own," he said recently. "I don't think prices will go down before 2008, when the Olympics come."
Others aren't so sure. In Beijing, residential property for $2,400 a square meter — about equivalent to the average in the hot Los Angeles County market — isn't unheard of, while in Shanghai, the value of all property sold in the first quarter was up 42% from a year ago.
That kind of vertical growth has stoked concern that China's urban property market is headed for a crash. And some economists see that runaway market as part of a far broader, more disturbing problem.
China's dazzling economic expansion, they believe, is accelerating so fast that it has begun to spin out of control, morphing into a bubble that could burst, much like the U.S.' dot-com boom four years ago or Japan's real estate bubble a decade ago.
The torrid pace of China's industrial growth has generated serious over-investment in factories and other ventures that are straining the country's resources. Electricity and water shortages are mounting, transportation bottlenecks are developing, and the first hints of inflation are showing up in official data.
The government has begun taking steps to slow growth, hoping to bring it to a more manageable rate of about 7% annually — fast by any other nation's standards but significantly slower than last year's 9.1% rate.
The task is delicate and the stakes extremely high. If the government applies the brakes too hard and growth falls too fast — creating what economists refer to as a hard landing — the effect would reverberate globally, markedly slowing the recoveries of the United States and many other nations that have become increasingly linked to Asia's new industrial powerhouse.
It could affect the livelihoods of Americans whose fates are closely tied to China's growth, including copper miners in Arizona, waste paper recyclers in Los Angeles and cotton farmers in the San Joaquin Valley. China is the fourth-largest market for California merchandise exports, after not even making the top 10 in 2000.
"We should reduce the speed but not have a sudden slowing," Chinese Premier Wen Jiabao said last week. "The most important thing is that we have to control the two valves: One is credit; the other is land."
In recent days, fears of a sharp slowdown have pushed down prices of industrial commodities that China has been buying to feed its booming factories. Stocks also fell in Japan, Taiwan and other Asian nations whose exports have found eager buyers on the mainland.
Inflated property values are now the core problem of China's overheating economy, says Andy Xie, Morgan Stanley's chief economist for the Asia-Pacific region. He says inflated property values are used — often by local and regional governments eager to promote their areas — as collateral to fuel dubious investment projects that, in turn, have driven up demand and prices for steel, aluminum, cement and other raw materials.
The frenzied climate is driving more businesses into red ink as factory owners are forced to pay more for raw materials yet are unable to pass on those costs in the current overcrowded, highly competitive market.
"Property is the origin of it all," Xie said. "It can't keep going like this."
Many specialists tracking China's unprecedented transformation from a centrally controlled economy to a freewheeling capitalist market dispute the bubble diagnosis. But most agree that without swift, decisive corrective measures from the government to damp investment spending, the country could be headed for a hard landing.
"My analysis of the bubble is that, across the whole economy, it is not such a problem, but in real estate it is getting serious," said Hua Min, head of the Institute of the World Economy at Shanghai's Fudan University.
With consumer spending still weak, economists say, the investment-led boom has been fueled mainly by large inflows of foreign capital and "hot money" from abroad. Xie and others believe that neither source is enough to sustain stable, long-term growth.
By most measures, urban property prices are already abnormally high. Hua estimated that a middle-class Chinese must spend as much as 25 times his annual salary to buy an apartment, whereas an American typically spends two or three times his income.
China's latest capital investment growth statistics are breathtaking. Spending on housing, commercial buildings, factories and other property — so-called fixed asset investment — grew 43% in the first quarter versus the same period in 2003. And last year, investment spending accounted for nearly two-thirds of China's 9.1% economic growth, according to the Asian Development Bank.
International banks and financial houses forecast the mainland's growth for this year at 8% to 11%.
When China's last bubble-like boom imploded in 1992-93 — falling from 14% growth to 7% by 1999 — the event generated more curiosity than concern in the global financial community. Beijing's capitalist reforms were in their infancy, China was still on the fringe of the global financial community, and its trade and investment links were a small fraction of what they are today.
Times have changed. Economists now see China as the world's second-biggest engine stimulating global economic growth, behind only the U.S. It is the world's fourth-largest trading power and the fastest-growing major national economy.
In East Asia, exports to China have become the single most important source of new growth for Japan and South Korea and a vital market for other countries in the region. China's economic dynamism also has sparked a new self-confidence and regional identity in a part of the world where a sense of shared destiny has historically been weak.
For Asia, a China slowdown would dent more than just trade ties. With more than half of China's $438 billion in exports last year produced by foreign-funded enterprises, it also would ripple through corporate boardrooms of large investor companies, possibly disrupting deliveries and adding to the cost of Chinese-made consumer products in Western markets, including the United States.
A slowdown also probably would depress global prices of metals and other raw materials that have risen briskly on the back of accelerating Chinese demand. According to an Asian Development Bank study released late last month, China is now the world's largest consumer of copper, tin, zinc, platinum, steel and iron ore, and has become one of the globe's leading buyers of aluminum, lead, nickel and gold.
Commodity prices tumbled on world markets late last month on media reports — erroneous as it turned out — that Beijing had ordered a weeklong suspension of all loan approvals in what was viewed as a draconian attempt to slow the investment boom.
China's leadership took its first tentative steps to control growth last summer by increasing the amount of money banks must hold in reserve — a measure that took money out of circulation and away from potential investors. Since then, the government has become steadily more assertive, further tightening bank reserve requirements on two occasions and tightening approval procedures for investments in fast-growing sectors such as steel, aluminum and cement.
It has pledged to punish violators and has publicized some dramatic crackdowns to underscore the point. The central government recently shut down several industrial projects, including a steel mill in Changzhou after determining that the local government had illegally forced farmers off their land, then built the plant on that land without proper authority.
Media accounts of the closure reported that at least eight of the plant's senior executives were arrested and the local Communist Party secretary demoted. Although the story underscores the central leadership's determination to assert its control over the economy, it also reflects the tenuous nature of the central government's writ over development and how far local and regional authorities are willing to go to get a piece of China's industrial growth.
Still, some believe the measures have begun to bite and that a hard landing isn't inevitable. Donald Hanna, Citigroup Inc.'s chief economist for Asia, noted, for example, that investment spending slowed sharply in March, bringing growth in fixed investment spending down from 53% during the first two months of the year to 43% for the first quarter.
"Officials know the economy needs to slow and are acting," he said.
"Using the term 'bubble' for China today is premature."
The central government also has acted to slow down the property market, including a tightening of mortgage lending, increasing the minimum down payment and banning the sale of apartments before completion. There also has been talk of an interest rate hike, but there is little sign of a slowdown in that crucial sector.
Although praising the government for its efforts to control the investment boom, experts say the real key lies in boosting borrowing costs on domestic loans, whose interest rates are half of the country's overall economic growth rate.
"If people can get a one-year loan at 5.3% interest in an economy that's growing at nearly 10%, people are going to want a lot of it," Hanna said. "And what's cheap is easily wasted."
However, Hanna noted that some prospective borrowers paid little attention to loan costs because they didn't intend to pay the money back. That fact has steadily pushed up the value of nonperforming loans to a level estimated at about $500 billion.
Over the longer term, many believe China can enjoy steady, stable economic growth only when the purchasing power of its 1 billion consumers becomes a principal growth engine. Last year, consumer spending contributed less than half of China's economic growth. By contrast, consumer spending accounts for two-thirds of the U.S. economy.
For some, the long-term recipe for China's economic stability is an equitable sell-off of the hundreds of billions of dollars of the state's remaining assets in a way that empowers the Chinese consumer.
"It must be done in a way that sparks a boom in consumption," economist Xie said. "That's the path to stable, sustainable growth."
Marshall reported from Hong Kong and Magnier from Beijing. |
