China heading for housing bubble
Updated
Well while India considers withdrawing its stimulus - China is asking the question has its stimulus gone too far?
The Chinese Government's massive stimulus spending this past year has helped fuel a property boom -- that some China watchers fear is fast turning into a bubble at risk of bursting. Property sales in China have surged 85 per cent over the past year and prices of new apartments in Shanghai have risen by nearly 30 per cent alone. Arthur Kroeber is head of Dragonomics -- a highly regarded independent economics research firm based in Beijing. He says managing the house price bubble will be one of the key challenges facing the Chinese Government in the coming year as economic growth continues to strengthen.
Presenter: Sheryle Bagwell
Speaker: Arthur Kroeber, managing Director of Dragonomics -- an independent economics research firm based in Beijing
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KROEBER: We don't really see it quite yet but I think by the second half of next year, the second half of 2010 there's going to be a very serious issue that the government will have to deal with of asset prices rising, and specifically housing prices. Housing is really the focus because there really isn't an effective pension system in China so individuals think of investments in property as their best insurance policy for old age. So in addition to the pressure created by literraly 10 or 15-million people moving into Chinese cities from the countryside every year and needing to be housed, on top of that you have this pressure from people already in the cities who want to buy their second house because that's essentially their retirement plan. So every time you get extra money in the system as you have now, that puts tremendous upward pressure on housing prices and makes it very difficult for ordinary families on just living on normal incomes to think about buying a house. So I think that's going to be a major problem for the government next year and they're going to have to come up with a new set of economic policies that balances the need for continued stimulus to boost growth while at the same time trying to keep housing prices under control.
BAGWELL: These issues of course are increasingly important to Australia because our fortunes are increasingly linked to China. I wonder from where you sit is that something that Australia should be concerned about?
KROEBER: Obviously if it's your biggest customer you need to be very concerned about the health of that customer. I think if we look over the next five or ten years it's likely that China will continue to operate on a fairly resource intensive investment driven path of growth, and that's basically good for Australia. I think the thing to be a little bit cautious about however is that the Chinese are very concerned about the intensity of their resource use, especially energy but also metals and so forth that they have to import. And the government is putting a lot of energy into pressuring companies to be more efficient in their use of resources, and this is actually started to have some impact.
BAGWELL: So are you saying that China's appetite for Australian resources could go down as a result as companies become more efficient, and there's also the issue of over-capacity as well isn't there?
KROEBER: Yeah, I don't think that's a problem in the short term. In the short term you've got very strong growth. But yes, if you look out in the medium term, three to five years you have problems of over-capacity, which could cause a big pause in Chinese resource demand, and I think the efficiency imperatives are going to grow because China's very concerned not only about the cost of importing all this stuff, but they're also concerned about the impact that their heavy industries have for example on global warming and climate change. And there's a strong desire to reduce emissions, reduce the carbon intensity, reduce energy usage, reduce resource usage in general. And they've just begun these policies to encourage the efficiency and I think those will have more and more impact over time. So you just need to be cautious about what impact those will have on Chinese demand.
BAGWELL: Should Australia also be cautious about the number of Chinese companies, particularly state-owned enterprises that are now seeking to invest in our mining companies in particular, indeed China is set to become Australia's third biggest foreign investor this year?
KROEBER: I think the first thing to recognise is that China is regaining the place that it had for about two-thousand years, up until the mid-19th century as one of the world's major economies. And I think the world just has to recognise that it's normal for China to be a big, big player, and that means that China is going to have a lot of money to invest throughout the world in a wide variety of things and people have to get used to that. At the same time I think China unlike the US or European countries or even Japan before it, it poses a special challenge to the international investment regime because so many of the companies that are making these investments are state controlled. The nature of the state in China is something that I think most people in western democracies are very uncomfortable with, and so I think quite naturally people look at these investments by China and Chinese state-owned firms and they ask well what are the motivations of these firms? Are they purely commercial or are they pursuing some kind of political or strategic agenda that's being dictated by bureaucrats in Beijing? We just don't know. And the Chinese companies in fact are unable to respond to those concerns in a very clear way. So they find it very difficult to build trust in a place like Australia we're they're investing large scale. I think they can do much better job of their companies making it clear that they are really commercial entities and they're being driven by business objectives, not by political objectives.
BAGWELL: Just finally, rising economic growth is going to make for a wealthier China, do you think a richer China will become less authoritarian over time?
KROEBER: There's no way for China to sustain fast paced economic growth over the long term without becoming a more open society and a society where the government is more accountable to its citizens. There's no question about that. That said I think that the political development in China will be very slow and that the end point is probably not going to be democracy as we're used to it, it will be some distinctively Chinese form of government that blends more openness and accountability with a much more structured and in some ways authoritarian system than we're used to.
