Quantcast

China's Economy in 2013: Can it Ease the Property Bubble?

China’s pivotal Year of the Dragon is drawing to a close. The 18th party congress leadership transition went off mostly without a hitch, and the Bo Xilai scandal is already fading from official memory. While economic growth has certainly slowed and could slow more, it would be rash to expect a sudden collapse or implosion of the Chinese economy, as Western observers have been predicting for almost as long as China’s economy has been growing at over 8%. But even withstanding a slowdown, China’s main problem in the near future will be weaning its investment away from real estate fueled growth and into more productive areas of the economy.

In January 2012, China officially became a majority urban nation, with more than 50% of the population living in cities. It was a major milestone for a civilization that has been primarily agricultural for centuries. Urbanization is a major cornerstone of the country’s growth policy, and yet by some measures there may be 200 million empty apartments in China today. Controls on private lending and investment mean that real estate is the safest form of investment for China’s wealthy. 

The origins of China’s runaway property development also stem from its unique system of “fiscal federalism." Since economic reforms in the early 1980’s the central government began allowing local and provincial governments a larger share of tax revenue, increasing incentives for cities to foster industrial development and so-called “township enterprises” that were crucial to success of early economic reforms. 

Beginning in the late 1990’s until 2002, the central government began to reclaim a higher share of taxes generated from local economic activity: taxes on businesses and manufacturing. That led local governments to rely mostly on fees generated from land-transfer as their prime revenue source. Because all land is technically owned by the state in China, developers must lease urban land from local governments for 70 year periods. Because of the potential profits it’s no wonder real estate is the most corrupt industry in China. There is also a disproportionately high number of real-estate moguls in China’s billionaire club.

While urbanization may be key to China’s continued growth, urban development featuring flashy designs but lacking innovative job creation is the more common reality today. Amid growing frustration with inequality and official corruption, the new leadership has sent signals that they are serious about cracking down on official misconduct.

However, the unchecked authority of local governments, especially in appropriating peasants’ land for their own gain, is the largest source of corruption and abuse of power. Without taking on the unsexy but crucial problem of revenue sharing and local government finance, the party may be unable to deal with larger problems like reforming its financial system or creating more balanced growth.

But that doesn’t mean China’s economy is a bubble or a giant mirage, as is often thought.  The increase in wealth and opportunity over the last 30 years is real. While much investment has been wasteful, a lot has paid off: China now has the world’s largest high speed rail system and is already beating the U.S. in production of green technology, like solar panels. Even with a slow down or property bubble burst, China is still a continent-sized country of 1.4 billion people with aspirations to eventually displace the U.S. as the world’s largest economy and reclaim its former greatness as “the middle kingdom.” That future might still be far off, but the recent U.S. fiscal cliff and debt ceiling spectacles have only given Chinese leaders confidence that their system is now more stable and more efficient at creating economic growth than is the system in the leader of the free world.

Like us on Facebook:
CLOSE | X

Do you agree that our
generation needs a voice?

Take a One-Question Survey and Give Us Your Feedback.
Take the survey now