The meaning of a bubble in the economy
Over the last few years, there has been tremendous growth in the Chinese economy. Financial analysts the world over have likened this growth to a bubble waiting to explode. The person who set off this “bubble debate” was the perceptive financial mind Jim Chanos who is credited with predicting the fall of the once-robust Enron. Chanos views the economic growth that China is experiencing today as too good to be true.We will write a custom Is There a Bubble in China’s Economy? specifically for you
for only $14.00 $11,90/page 308 certified writers online Learn More
Like Enron and other high-flying companies whose fall came after experiencing phenomenal growth, Chanos warns that the Chinese economy is headed for the same fate. This talk of a bubble waiting to explode is worrying many investors who view China as the sole solution of lifting the global economy out of the economic downturn being experienced worldwide. Chanos predicts that China will produce a worse fate than the one that was experienced in Dubai. Although some analysts claim that Chanos and his ilk are wrong on the Chinese issue, we are still left with the question of whether the Chinese economy is really a bubble waiting to explode. (Nusbaum)
Pros and cons of the topic
The main issue that led Chanos to declare that China was a form of a bubble was the credit excess being witnessed in China. In the last few months, the Chinese government rolled out a stimulus program amounting to the excess of $580 billion that was meant to lift exports and encourage consumption among Chinese customers. This stimulus package and the overrated bank lending is said to be creating a false demand for consumer goods.
According to financial analysts, this is raising the risk of having nonperforming credit. By all standards, there is a possibility that the Chinese market is creating excess goods that they can be able to sell. Because of the excessive bank lending, there has been a repeat of the building boom lastly witnessed at the beginning of 2008. Financial analysts view this as a wasteful venture that’s overrated and one that could set the economy for a fall. (Amin & Chen)
Uncertainties that surround the subject
In the year 2009 alone, the sale of property in China jumped to a massive 76% within just a few months. In the early months of 2010, there were reports that property prices were rising by a margin of within 10-12% per month. Given this momentous growth, financial analysts are afraid that a negative effect in the real estate market could affect the rest of the Chinese market in a massive way. By looking at events in history, this is, in reality, not a farfetched notion since the same fate happened in the United States and in Japan. The fact that China is expected to contribute to about a third of the world’s growth this year makes the issue a global concern.
The aggression with which the Chinese government has been approaching the current finances also leaves a lot to be desired. In a bid to bridge the gap left by the reduction of exports, the Chinese government increased domestic spending through a stimulus project that is viewed to be one of the largest in recent history. In the months following the rollout of this massive stimulus package, Chinese banks gave out loans amounting to $1.4 trillion, a sum that has been unprecedented. According to economic officials, both the stimulus package and the hefty loans spurred the country’s economic growth to about 12.6%. This growth was used to offset a 3% point reduction that had been brought about by a decline in GDP from overseas trade. (Amin & Chen)
The consequences of the subject
Although the massive bank lending and the government’s stimulus package has greatly boosted the Chinese economy, it has not come without its challenges. Mostly, a large portion of this stimulus spending has been injected into real estate. This has, in turn, created a menacing imbalance and created a possibility for massive amounts of bad loans. In the scenario where this arises, the Chinese government would have to offset the bad debts.Get your
100% original paper on any topic done
in as little as 3 hours Learn More
Many commercial developers who used the stimulus cash and made constructions on speculation are now finding it hard to get tenants for their property. Many shopping centers and office blocks have now been left unoccupied, something that has left the owners in a big predicament. In the residential market, the situation is the opposite. Estimates show that there is an acute shortage of residential houses that have been brought about by the high demand for residential houses. (Denning)
Own thoughts concerning the subject
As it is, there are many uncertainties that surround the bubble talk in Chinese real estate. In the recent past, the Chinese central government has been taking some drastic measures to cool things off. One of these measures has been to increase the bank reserve requirements and the basic lending rate. Although this has been the case, the official lending target for this year still outpaces the 2008 credit sum. This shows that the whole issue is still far from being resolved. In the case that the bubble does indeed “burst,” there is bound to be numerous consequences. Currently, China is the third-largest market in the world after America and Japan.
By the turn of this year, the country is expected to occupy the second position. The IMF forecasts that the Chinese economy will grow to about 10%, a figure that is double the general world rate. In the event that the Chinese economy crumples, it might set the pace for another round of global recession. (Denning)
Personally, I think that the talk of a bubble in China’s economy is overly overrated. Although I agree that an economy with such rapid growth is usually fragile, I refuse to agree that the decline will be momentous. In any economy, it is usual to experience both upside and downside volatility and surprises. As it is today, most Chinese citizens are leaving rural places in search of a better life in urban places. This calls for more construction to accommodate this growing migration. This fact rubbishes the whole talk of a bubble in real estate since more houses are still required in the near future to cater to the increasing population.
The condition in China is stable
For the past few months, the Chinese economy has been receiving many negative comments, mainly due to its phenomenal economic growth. There have been speculations that its economy is like a bubble waiting to explode. These rumors are gotten from the notion that China is producing more than it can consume. The Chinese real estate segment is seen to be the bedrock of this bubble that experts warn might bring about the next round of global recession.
However, this talk is unfounded since the majority of those fuelling it is not real experts in Chinese matters. Besides, China’s real estate market is still open for further growth since most third and fourth-tier cities are still open for growth. On top of this, the majority of China’s rural population is migrating to urban places hence creating the need for more housing.
Amin, Haslinda & Chen, Shiyin. China May “Crash” in Next 9 to 12 Months, Faber Says, 2010. Bloomberg. Web.We will write a custom
Is There a Bubble in China’s Economy?
specifically for you!
Get your first paper with 15% OFF Learn More
Denning, Dan. China’s Economy is the Greatest Bubble on Earth, 2010. Web.
Nusbaum, Roger. Is China’s Economy Another Bubble? 2010. Web.