The Mother of All Bubbles
August 10th, 2009Andy Xie, a well-known independent economist based out of Shanghai, recently wrote a lengthy and lucid account of how the current asset bubbles in China (stock market and property) developed, how they’ll be pricked, and the effects of the bubbles on China’s future short-term and long-term prospects economically and socially.
The most serious damage that a property bubble inflicts is in changing demographics. High property prices bring down birth rates. When property prices decline after a bubble bursts, the low birth rate culture cannot be changed. Hong Kong, Japan, Korea, and Taiwan all went through property bubbles during their development. Their birth rates dropped during the bubbles and didn’t recover afterwards despite government providing incentives. China’s one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn’t be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.
Richard McGregor at the Financial Times writes how the bubbles will affect China’s change in leadership in 2012 – the same year Mr Xie expects the Big Bubble to burst.
August 10th, 2009 at 10:27 am
Granted I’m not an economist, but while the short term (5 years out or so), long term still looks good. Why? Because there is a transformation towards more domestically driven growth, though this will take some time to be put into place. What is encouraging is to see so many new tech parks and R&D centers being setup, the jobs generated by filling up these areas are betting paying, and will be a huge help in this.
The demographics crunch, in my opinion, for the nation is not really _that_ bad because it will allieviate China’s constant employment problems, as well as other problems related to over population. Personally I look forward to the day the one child policy is no longer needed. However, a declining population does not necessisarily equate to a countries decline, South Korea has an aging population, but it still has energy left in it. Japan’s decline is mostly because of economic, social, and political stagnation, their failure to let go of the confucian “we’ve been doing something a certain way for a long time so we’re going to keep doing it, reality be damned” way of thinking has cost them dearly.
As for when the urbanization will be complete, it will still take a long time. Even in 25 years the urbanization will only be ~70%. For comparison the United States in 1985 had an urbanization rate of ~75% (http://ww2.unhabitat.org/habrdd/conditions/northamerica/us2.gif), so the urban workforce will keep growing for many decades yet.
August 10th, 2009 at 10:32 am
I’ll also add that there is a headline in the financial times stating the government is ordering banks to put the breaks on lending, so it appears mr. xie’s assessment about the government’s action is correct, hopefully he is also right about it limiting the size of the bubble.