May 162014

Worried about China’s property bubble collapsing and cratering the global economy? Relax. “China’s boom is over; but Beijing will avoid a bust.” Or so reads a headline on the back page of the May 13, 2014, issue of my favorite newspaper, the Financial Times.

The column by Jay Pelosky of J2Z Advisory, a global-asset-allocation strategist, opines that pollution and corruption are greater — if less-quantifiable — risks in China today than a credit/property bust. But Pelosky does warn that China’s slower growth “represents a wet blanket that will damp the world’s growth and inflation outlook for years to come.”

But there is a more ominous tone to a column on the op-ed page of the same edition by George Magnus, formerly chief economist of UBS. People have been crying wolf about Chinese property for years, Magnus writes, adding:

. . . but now is the time for the world to pay attention. Property activity indicators have been trending lower since mid-2013, and the downturn in the sector now threatens to turn into a bust. At best, China is entering a deflationary phase at a time of global fragility.

Magnus notes that property investment accounts for about 13% of China’s GDP, roughly twice the level of the U.S. at the peak of the housing bubble in 2007. Add the production of steel, cement and other construction materials, and the GDP share rises to 16%. Property, he says, account for about a fifth of commercial bank loans, but as collateral for at least two fifths of bank lending. Writes Magnus:

China is different from the west in many ways but the real economic effects of a burst property bubble as the same the world over. Beijing will have to cope with them in the next two years but the rest of us should be prepared for the deflationary consequences in a still fractious global recovery phase.

Pelosky calls the pollution problem in China “a known and high visible problem” which in time will require “shutting down factories and throwing people out of work . . . That a solution to one problem begets another problem is symptomatic of China today.”

Pelosky writes that China’s leaders missed the boat with their 2009 stimulus program. The West regarded the program a sign of Chinese macroeconomic flexibility and management skill. Internally, it is regarded as a “big strategic mistake” that “resulted in huge misallocations of capital that will trouble China for years as projects come on stream to a much weaker demand profile.”

Had China begun needed reforms — of state-owned enterprises, to pick an obvious example — in 2009, it could have blamed any resulting mistakes on the U.S. financial crisis. No such handy scapegoat exists today as leadership deals with big economic issues, including capital controls, interest-rate liberalization, job creation, social issues and reform of state-owned enterprises. Bad unintended consequences instead will be laid at the feet of today’s leadership, “a significant brake,” writes Pelosky, “on the speed and magnitude of reform.”

Both columns are well worth reading, as is anything on China in the Financial Times to Jamil Anderlini, its Beijing-based correspondent. Last I looked, after registering at the web site with an e-mail address and password, anyone can retrieve a few articles a month (eight, I think) before encountering the dreaded pay wall. I happily subscribe to the broad sheet printed on salmon-colored newsprint.

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