Advertisement
China property
OpinionComment
Anthony W.D. Anastasi
Anthony W.D. Anastasi

Opinion | Why a property crash could be good for China

  • The wealth redistribution would benefit ordinary families, boost consumption and rebalance the economy
  • China needs more sustainable economic growth and, crucially, it has the tools to minimise the short-term pain needed to achieve this

Reading Time:3 minutes
Why you can trust SCMP
21
Country Garden’s unfinished Wangjiang Mansion residential project is seen in Yangzhou, Jiangsu province, on September 7. The developer recently narrowly avoided a debt default. Photo: Bloomberg
Anthony W.D. Anastasi
Since China started tightening lending restrictions for property developers, to rein in debt, there have been headlines about impending doom for the real estate sector. We have since seen major Chinese developer Evergrande file for bankruptcy protection in the US while Country Garden, the country’s largest developer until last year, flirts with a default.
Advertisement

Despite property prices across China struggling to recover, the day of reckoning has yet to come for the sector. However, participants and onlookers must ask whether there is any benefit to delaying a correction.

China’s real estate sector accounts for 25-30 per cent of its economy, compared to just 15-18 per cent in the US. China’s massive investment has resulted in some 50 million empty flats, sold but unoccupied. What is surprising is that this surplus has not dampened prices further.

In Shanghai, a city with a per capita gross domestic product of about US$25,000 last year, the average property price per square metre is US$18,400. In comparison, the average price in New York is just US$16,500, against a much higher GDP per capita of over US$100,000. This stark difference in housing affordability underscores the distortions and imbalances in China’s real estate market and its broader economy.

Several domestic headwinds pose challenges to the Chinese economy. These include low consumption and a growing reliance on unproductive investments fuelled by a perilously high savings rate and an increasing debt burden. The challenges stem from what former premier Wen Jiabao labelled in 2007 as “unbalanced” growth.
Advertisement

This results from the unequal distribution of income generated by GDP. Ordinary households, which should allocate most of their income to consumption rather than savings, retain too small a share of the national GDP. Meanwhile, businesses, local governments and wealthy households claim an oversized portion of GDP, leading to a significantly elevated rate of savings and investment.

Advertisement