Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Op-ed

The End of China's Property Boom—A Bang or a Blip?

by Daniel H. Rosen, Peterson Institute for International Economics

Posted in the China Real Time Report, Wall Street Journal
April 23, 2010

© Wall Street Journal


China's economic data for the first quarter of 2010 brought long-simmering worries about overheating to a boil and was quickly followed by tougher-than-expected measures to restrain property speculation from the State Council, the nation's highest government body. The latest measures drove down shares in real estate developers and related companies, and crystallized fears about the aftermath to the strongest stimulus-led recovery in the world.

The bottom line is that a correction in residential property is starting but China is not looking at a pullback in GDP growth to below 8.5 percent this year.

After a slew of half-hearted attempts to address property prices, Beijing is doing it for real this time. Last week the State Council announced measures including higher minimum down payments for second homes and higher deposits for first home purchases, and this week the first trial of property taxes was reportedly authorized. We are likely at the beginning of a correction in upper-end, first-tier city real estate. There will be some dumping of speculative property, and there could well be a hint of panic in the air over the coming months.

Is a hard landing in China—and thus a negative demand shock for the whole world—going to be the result?

I think the authorities will win the battle for sentiment in the property market, but it will take some months for the nausea to subside. Beijing will pull out all the stops to show that what is taken out of high-end property will be made up at the lower-end real estate. And in terms of overall economic growth, China is looking at a soft-ish landing at worst.

A major reason is that the structure of China's growth is not fragile or prone to a spreading, broader correction. The economic data for March did not show a strong spike, just the same growth that has been on track all along. The composition of growth in gross domestic product in the first quarter was: consumption 52 percent (or 6.2 percentage points of the overall 11.9 percent growth rate), capital formation 57.9 percent (6.9 percentage points of growth), and trade –9.9 percent (which subtracted 1.2 percentage points from growth). Let's consider the outlook for each of these three GDP expenditure components.

Property policies will finally start to detoxify investment growth rates, but this will take time to effect and will not stop most projects in the pipeline. Discipline on frothy residential development in tier one and tier two cities will help to sustain investment at a manageable level and frees up capital for other investment activities—for which there is plenty of demand.

And there is still plenty of credit fueling investment activity in China: After January, when net new lending was as large as the big months of 2009, February and March lending moderated. But if we just look at medium- and long-term lending and leave aside short-term financing against receivables, new credit is not slowing in 2010; it is still increasing. Private investment of money is slowly coming back, as are foreign investors and those from Hong Kong and Taiwan. So investment activity is broadening. Service sector investment is growing at 30 percent, manufacturing at 26 percent.

Consumption is now contributing more to growth than in any annual performance since 1993. Unfortunately, there is no way to tease apart household consumption from government consumption growth on a quarterly basis, so we can't be sure that this is not just a cyclical effort by government to be supportive. But consumer confidence is high and rising, supported by income growth: Disposable income is up 10 percent year on year in urban China, and consumption expenditure is up 11 percent—showing a slight increase in propensity to consume rather than save. Notably, growth in big-ticket autos, household renovation, and furnishings are coming down to earth, while the broader basket of consumer goods from cosmetics to clothing and electronics are stepping up handsomely. A housing correction will not take the wind out of retail sales, in other words.

On the trade side, China ran a trade deficit in March for the first time since April 2004. And Commerce Ministry officials have said that net exports would fall to a mere $100 billion this year (from around $300 billion in 2008 and $200 billion in 2009). However, this is unlikely to actually happen unless the United States and European Union experience a painful double dip this year. If the United States and European Union grow at 4.5 percent and 2 percent respectively this year, then China will move back to a growing trade balance for 2010. The negative trade contribution to growth is already somewhat moderated, and trade will surely contribute much more to China's growth this year than last year.

The bottom line is that a correction in residential property is starting but China is not looking at a pullback in GDP growth to below 8.5 percent this year. This assumes that the trade surplus holds up at around $200 billion, rather than contracting by half as a result of a double dip in the United States and Europe.

Of course, the development that could undermine this point of view is domestic inflation. If consumer price index (CPI) inflation, which came out at 2.4 percent in March, were to resume an upward spiral, that would force additional steps that could easily trigger a more alarming pullback.

Follow-up article: China's Other Achilles' Heel


RELATED LINKS

Policy Brief 13-16: Preserving the Open Global Economic System: A Strategic Blueprint for China and the United States June 2013

Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Revised August 2013

Policy Brief 12-7: Projecting China's Current Account Surplus April 2012

Book: Sustaining China's Economic Growth after the Global Financial Crisis January 2012

Book: Eclipse: Living in the Shadow of China's Economic Dominance September 2011

Op-ed: For a Serious Impact, Tax Chinese Assets in the United States October 13, 2011

Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011

Op-ed: Why the World Needs Three Global Currencies February 15, 2011

Policy Brief 10-26: Currency Wars? November 2010

Op-ed: Obama Has to Tell Beijing Some Hard Truths November 29, 2010

Testimony: Correcting the Chinese Exchange Rate September 15, 2010

Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit August 2010

Book: China's Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities July 2010

Op-ed: Chinomics: Yes, China Does Need that Infrastructure June 23, 2010

Policy Brief 10-16: Deepening China-Taiwan Relations through the Economic Cooperation Framework Agreement June 2010

Testimony: China's Exchange Rate Policy and Trade Imbalances April 22, 2010

Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010

Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010

Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010

Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010

Peterson Perspective: A Growing US-China Rift January 6, 2010

Book: China's Rise: Challenges and Opportunities (hardcover) September 2008

Paper: China Energy: A Guide for the Perplexed May 2007

Speech: Is China a Currency “Manipulator”? January 28, 2009

Testimony: China's Role in the Origins of and Response to the Global Recession February 17, 2009

Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006

Book: Debating China's Exchange Rate Policy April 2008

Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011

Testimony: A Muscular Multilateralism to Engage China on Trade September 21, 2011

Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011

Book: The Future of China's Exchange Rate Policy July 2009