The U.S. can’t afford a Chinese economic collapse
By Zachary Karabell
MARCH 7, 2013
Is China about to collapse? That question has been front and center in the past weeks as the country completes its leadership transition and after the exposure of its various real estate bubbles during a widely watched 60 Minutes exposé this past weekend.
Concerns about soaring property prices throughout China are hardly new, but they have been given added weight by the government itself. Recognizing that a rapid implosion of the property market would disrupt economic growth, the central government recently announced far-reaching measures designed to dent the rampant speculation. Higher down payments, limiting the purchases of investment properties, and a capital gains tax on real estate transactions designed to make flipping properties less lucrative were included.
These measures, in conjunction with the new government’s announcing more modest growth targets of 7.5 percent a year, sent Chinese equities plunging and led to a slew of commentary in the United States saying China would be the next shoe to drop in the global system.
Yet there is more here than simple alarm over the viability of China’s economic growth. There is the not-so-veiled undercurrent of rooting against China. It is difficult to find someone who explicitly wants it to collapse, but the tone of much of the discourse suggests bloodlust. Given that China largely escaped the crises that so afflicted the United States and the eurozone, the desire to see it stumble may be understandable. No one really likes a global winner if that winner isn’t you.
The need to see China fail verges on jingoism. Americans distrust the Chinese model, find that its business practices verge on the immoral and illegal, that its reporting and accounting standards are sub-par at best and that its system is one of crony capitalism run by crony communists. On Wall Street, the presumption usually seems to be that any Chinese company is a ponzi scheme masquerading as a viable business. In various conversations and debates, I have rarely heard China’s economic model mentioned without disdain. Take, as just one example, Gordon Chang in Forbes: “Beijing’s technocrats can postpone a reckoning, but they have not repealed the laws of economics. There will be a crash.”
The consequences of a Chinese collapse, however, would be severe for the United States and for the world. There could be no major Chinese contraction without a concomitant contraction in the United States. That would mean sharply curtailed Chinese purchases of U.S. Treasury bonds, far less revenue for companies like General Motors, Nike, KFC and Apple that have robust business in China (Apple made $6.83 billion in the fourth quarter of 2012, up from $4.08 billion a year prior), and far fewer Chinese imports of high-end goods from American and Asian companies. It would also mean a collapse of Chinese imports of materials such as copper, which would in turn harm economic growth in emerging countries that continue to be a prime market for American, Asian and European goods.
China is now the world’s second-largest economy, and property booms have been one aspect of its growth. Individual Chinese cannot invest outside of the country, and the limited options of China’s stock exchanges and almost nonexistent bond market mean that if you are middle class and want to do more than keep your money in cash or low-yielding bank accounts, you buy either luxury goods or apartments. That has meant a series of property bubbles over the past decade and a series of measures by state and local officials to contain them. These recent measures are hardly the first, and they are not likely to be the last.
The past 10 years have seen wild swings in property prices, and as recently as 2011 the government took steps to cool them; the number of transactions plummeted and prices slumped in hot markets like Shanghai as much as 30, 40 and even 50 percent. You could go back year by year in the 2000s and see similar bubbles forming and popping, as the government reacted to sharp run-ups with restrictions and then eased them when the pendulum threatened to swing too far.
China has had a series of property bubbles and a series of property busts. It has also had massive urbanization that in time has absorbed the excess supply generated by massive development. Today much of that supply is priced far above what workers flooding into China’s cities can afford. But that has always been true, and that housing has in time been purchased and used by Chinese families who are moving up the income spectrum, much as U.S. suburbs evolved in the second half of the 20th century.
More to the point, all property bubbles are not created equal. The housing bubbles in the United States and Spain, for instance, would never had been so disruptive without the massive amount of debt and the financial instruments and derivatives based on them. A bursting housing bubble absent those would have been a hit to growth but not a systemic crisis. In China, most buyers pay cash, and there is no derivative market around mortgages (at most there’s a small shadow market). Yes, there are all sorts of unofficial transactions with high-interest loans, but even there, the consequences of busts are not the same as they were in the United States and Europe in recent years.
Two issues converge whenever China is discussed in the United States: fear of the next global crisis, and distrust and dislike of the country. Concern is fine; we should always be attentive to possible risks. But China’s property bubbles are an unlikely risk, because of the absence of derivatives and because the central government is clearly alert to the market’s behavior.
Suspicion and antipathy, however, are not constructive. They speak to the ongoing difficulty China poses to Americans’ sense of global economic dominance and to the belief in the superiority of free-market capitalism to China’s state-managed capitalism. The U.S. system may prove to be more resilient over time; it has certainly proven successful to date. Its success does not require China’s failure, nor will China’s success invalidate the American model. For our own self-interest we should be rooting for their efforts, and not jingoistically wishing for them to fail.