China's property bubble looks to be on the edge of collapsing. What does that mean for the world's growth and the US market?
The property market in the “Dubai of China” has imploded, according to a report from news agency France 24. There is what looks like a property bubble in many parts of the country, and the collapse of prices in one of its most prestigious markets could mean the beginning of the end of China’s massive economic expansion.
Property prices on the exclusive man-made Phoenix Island have fallen drastically. Apartments which were on offer for 150,000 yuan per square foot in 2010 are now being offloaded at as little as 70,000 yuan per square foot. There has been a lending boom in the country, and much of its property is owned on borrowed money.
The situation could, as we’ve speculated before, lead to a financial crisis in the East Asian economy. The company’s shadow banking system has grown much faster than its state banks. Much of Chinese wealth, 13% of GDP in 2011, is tied up in real estate. If the market is going to collapse it is going to bring the country’s economy to its knees.
There is no reason to rejoice here. China is the most important emerging market for many US companies, with firm’s like Apple Inc. (NASDAQ:AAPL), constantly citing the region as a future driver of growth. If China collapses, it will bring the world economy with it. A large contraction may cause a second worldwide recession.
China is well known for its obfuscating attitude toward economic indicators, and the complexity of its economy. The country has a population of more than 1.3 billion, and poor infrastructure compared to Western countries. Added to the government’s penchant for opaque administration, those factors make it almost impossible to predict when, and if, the Chinese property bubble is about to burst.
The matter rests with Chinese consumers. The Chinese property bubble, like any other, will collapse when people stop buying homes. It’s not easy to measure sentiment in China, but case studies like Phoenix Island demonstrate that the country’s property market is not as jubilant as it was two years ago. American investors should be on edge, but the 2013 market has been jubilant, the S&P 500 (INDEXSP:.INX) is up more than 6% for the year to date.
China is difficult to read, and the country accounts for a huge chunk of the world’s economy. A property crash in the country will, with little doubt, cause a major recession in the country. A hard landing for the China property bubble means a hard landing all over the world. Investors and policy makers should continue looking at the country. It will probably be the most important indicator of world economic growth in the year to come.