CHINA’S most serious economic problem is not its collapsing stock markets. It is neither its “ghost cities” nor property sector. The fact that thousands of businesses have gone under in the last years, as export growth and balance of trade have been erratic, is only a symptom. Even China’s declining economic-growth rate is not the greatest challenge facing the country.
China’s biggest economic problem is that all of these are so tightly connected that there is no room for minor economic disruptions.
For the first two months of 2015, China’s property sales fell 16.3 percent—the biggest in three years—against a drop of 7.6 percent for all of 2014. However, by April, conditions have been picking up. After several months of falling property prices as sales decelerated, the downtrend started to slow down. Prices in Shanghai and Beijing fell 4.7 percent and 3.2 percent, respectively, from 2014, compared with 5 percent and 3.7 percent in March. From March to April, prices actually increased slightly in both cities by 0.6 percent and 0.7 percent, respectively.
In the middle of March, the Shanghai stock market suddenly started moving higher and accelerated in April, just about the same time as the property sector started falling off a bit.
The stock market kept booming until the middle of June, when the current devastation of falling prices began. This is not a coincidence. Neither is it coincidental that since the stock-market peak in June, the property market is also changing.
Funds were not used to buy property, but were instead diverted into the stock market as it began to take off. But the relationship between real estate and share prices has been going on for a long time. The Shanghai stock market doubled in value from the middle of 2014 and started going higher just about the same time as the property sector started going down.
Now, because of the huge borrowing that funded the stock market, investors are forced to sell property to pay their stock-market debt. Property sales are up dramatically in June from the previous months.
Part of the problem is the prevailing get-rich-quick mentality from the elementary-educated farmer to the experienced investor. Money flows very quickly from one asset class to another and, further, there is not enough money in the system to support a bull market in both. Loan growth in China has been falling since 2012 and economic growth since then has not created enough new wealth.
China’s biggest economic problem is the “hot money” behavior of its investors and the lack of money to support that attitude.
Certainly we are all interested in getting rich as quickly as possible. But in the Philippines, there is much more prudent thought and behavior
involved when it comes to investments.
Image credits: jimbo Albano