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What’s the most important economic question in the world today?

BY MICHAEL YARDNEY

While many of us are concerned about the collapse of the euro or whether the US will fall back into recession, closer to home a more important question could be: will the China bubble burst?

Anyone watching China in the last few years must be wondering if it’s another bubble in the making. We all know Australia’s future prosperity is substantially reliant on the resources boom and a large part of that will depend on China’s growth.
What has all this got to do with property?

Well, the health of our property markets is intimately intertwined with our general economic prosperity.

Of course it’s not just Australia that relies on China.

China’s growing strength is essential to both the US and European recoveries as it contributed 19 per cent of the world’s economic growth in 2010, and that’s expected to increase to 24 per cent this year.

The strains of the last three decades of growth are starting to show.

There are now widespread reports of a property bubble in China with stories of large cities full of new high-rise buildings that remain unoccupied. ‘Ghost cities’ are signs of a property bubble in anyone’s language.

In addition, the Chinese factories are now having difficulty competing with other Asian countries that churn out goods more cheaply.

In response, the Chinese Communist Party has been attempting to put a damper on the debt-fuelled real estate boom as part of a deliberate attempt to rejig the Chinese economy into one that relies more on a domestic service sector and less on manufacturing and exports.

What would a China slowdown mean to us?

Well, it’s already started. China’s economy grew 9.1 per cent in the third quarter of the year, the slowest pace in two years.

This has some analysts asking: will the bubble burst or will there be a soft landing? Economists are arguing both ways and only time will tell, but China’s economy expanded 10.4 per cent last year and growth is forecast to slow to 9.5 per cent this year.

This, however, is six times the pace of the US and euro region, according to the International Monetary Fund, and expansion of nine per cent in 2012 will be eight times as fast as the group of 17 nations that share the European currency.

Let’s put it into perspective

Here are some numbers quoted earlier this year by ANZ’s Paul Braddick as he explains what could happen in China between now and 2025:

• 350 million more people will move to the cities (103 million have moved since 1990)

• 221 Chinese cities will have 1 million-plus people living in them (in Europe this number of cities is 35)

• 1 million kilometres of new road and 28,000 kilometres of metro rail will be laid

• 170 mass-transit systems will be built – twice the number in Europe

• 40 billion square metres of floor space will be built to construct five million buildings

• 50,000 skyscrapers will be built – the equivalent of building two Chicago’s every year

• 97 new airports will be built

• One in seven planes assembled by Boeing and Airbus will be delivered to China

• 1000 megawatts of coal-fired power capacity will be commissioned every week – equivalent to four million tonnes of new coal demand

• One wind farm turbine will be built every hour and a half

Now if those numbers haven’t blown you away…

I found some of these numbers quotes in The Telegraph interesting reading:

• 1.3 billion – China’s population as at 2009

• 10.3 per cent – China’s gross domestic product growth in 2010

• $US183.1 billion – China’s trade surplus in 2010

• 6.06 per cent – China’s official one-year lending rate. China last raised interest rates on Christmas Day last year

• Three per cent –China’s official deposit rate

• 4.6 per cent – China’s rate of inflation in December 2010, down from a 28-month high of 5.1 per cent the month before. Inflation for 2010 as a whole was 3.3 per cent

• 73 years – life expectancy of someone born in China in 2008, up from 71.3 years in 2000 and 46.6 years in 1960

• 4.1 per cent – China’s unemployment rate as at the end of December 2010

• 42 million – the projected population of China’s newly-planned ‘mega-city’. If correct, the city would be 26 times bigger than the Greater London area and twice the size of the entire country of Wales

• $36.4 billion – amount of new loans the biggest state-controlled commercial lenders gave out in 2010, much of it for property development

• 70 per cent – increase in sales of land-use rights to developers in 2010

• 6.4 per cent – amount property prices rose in 2010

• 1 million – number of people living in underground bunkers in Beijing

• 14.8 per cent – increase in retail sales in China during 2010

• 39 – average age of Chinese millionaires

• 8.4 per cent – average annual pay increase at multinational companies in China last year

• 500 billion yuan – the amount of direct economic losses caused by extreme weather in China in 2010

What’s ahead?

The anticipation of a slowdown in the Chinese investment boom has fuelled a host of pessimistic projections about how China will crash and cripple the rest of the world.

However Bill Mitchell, research professor in Economics and director of the Centre of Full Employment and Equity at the University of Newcastle in New South Wales has a different view.

He believes the Chinese government is on top of managing their economy, setting them apart from the leaders in the advanced world.

Mitchell says that China will not let a major economic crisis occur within its borders, explaining that they have so much more scope to expand, although all of us will rue the environment impacts of that expansion.

Mitchell suggests their problems are going to be political – for example, taming an increasingly rowdy middle class. For the rest of us, China provides an economic example, he says: when all other sources of expenditure fail, turn on public spending quickly and don’t err on the conservative side.

We’re in for some interesting economic times ahead. As always savvy investors prepare for the worst and look forward to the best outcome.

Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog