suffering losses. It’s difficult to tell if this is a short-term focus
brought about by the upcoming Presidential election or it’s a genuine effort to jump start the housing market.
The U.S. is not alone in suffering negative housing data. Although not nearly as drastic a situation as can be found in the
U.S. market there are troubling signs that the China economic
bubble is experiencing significant stress. Back in July of this year,
Chinese Prime Minister Wen Jiabao signaled that the Chinese
economy is facing “huge downward pressure.” This is the
bluntest message to date from Beijing about the Asian powerhouse’s economic problems.
China’s GDP growth is still expected to do well compared to
other countries—projected to deliver a relatively impressive
seven to eight percent in 2012—but that is considerably slower
than the Herculean 10-plus percent rate it has recorded in recent
years. With exports falling due mainly to the depressed economic
conditions in Europe and the U.S. and the Chinese real estate
market crumbling, China has experienced a genuine first time
slowdown in its real estate development.
In an effort to address these problems China’s government has
taken steps to boost economic growth by cutting interest rates and
approving new infrastructure projects through a stimulus effort.
However, a number of China pundits worry that China’s “
stimulus lite” policies will do little to prevent a “hard fall”, which would
have negative consequences for the U.S. and other countries that
have come to rely on China to fuel the global economy. Since 2007,
China has contributed significantly more to world growth than any
other country, and this is projected to remain the case into the foreseeable future. Is China just experiencing a normal economic adjustment or is China on the verge of a genuine economic crash
similar to what Europe and the U.S. have experienced?
Before addressing this question it’s important to point out the
key differences between what is happening in China’s real estate
market as opposed to the U.S. experience. First of all, although
there are signs of a definite slow down especially in select cities,
what we have not seen is a depression of real estate prices as happened in the U.S. in 2006 onward.
In fact, in most areas in China real estate prices have at worse
stabilized or in some instances, slightly increased. This has not
happened in the U.S. market where real estate prices have declined as much as 50 to 60 percent in some areas fueled mostly
by more than 3. 7 million home foreclosures. In fact, in the U.S.
home foreclosures are still underway today.
The Chinese banking system is very different from the U.S.
model in that China’s banking system is more or less govern-ment-owned. This changes the rules of the game considerably.
Standard risk management variables, such as the required capital adequacy ratio, which, by the way, is extremely high
amongst Chinese banks, and the non-performing loan ratio,
are only of marginal relevance because the integrity of the
biggest banks is guaranteed by the government. China’s central
government is willing and able to act on that guarantee if required to do so.
The level of public debt outstanding in China is modest and
even when contingent liabilities are taken into account, such as
debt taken on by local governments, the prospect of China
falling victim to a European style public debt crisis borders on
impossible. In fact, unlike the experience in the U.S., there is
little evidence that any deterioration in the housing market has
infected the Chinese banking system. Realizing that nationwide house prices have not in fact declined, this is perhaps not
a surprising situation.
58 | Coatings World www.coatingsworld.com October 2012
With exports falling due mainly to the depressed economic conditions in Europe and the U.S. and the Chinese real estate market crumbling,
China has experienced a genuine first time slowdown in its real estate development.
