The Chinese economy should be better able to handle a housing crisis than was the U.S.
The Chinese phrase for real-estate bubble is Fáng dìchǎn pàomò. For my students in Beijing, it's not a concept I need to spend much time explaining. As any Chinese citizen could tell you, property values have been exploding throughout the country for more than a decade. Central areas in first-tier cities like Beijing, Shanghai and Guangzhou now rival their Western counterparts in both opulence and expense.
But while an ever-growing housing bubble in Communist China may be cause for glee among Western observers anxious for some cathartic schadenfreude, anyone betting on a Western-style housing collapse-cum-recession will be sorely disappointed. Yes, stratospheric real-estate values are already starting to come back to earth, but the nature of the Chinese bubble and numerous other factors will preclude anything but a soft landing.
For most of the 2000s, the global economy hummed along on the current of U.S. spending and Chinese saving. This cycle, combined with rising home prices, concealed ominously increasing levels of private debt being amassed throughout the United States.
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In 2006, at the height of the bubble, the U.S. savings rate pushed the outer limits of leverage and fell into negative territory. America's pervasive culture of consumerism, debt and spending was the principal catalyst for all that followed--the first domino. Had Americans had more savings and more home equity during the downturn, more loans could have been serviced and fewer homes foreclosed. Fewer foreclosures would have preserved the integrity of the collateralized mortgage obligations, essentially large pools of home loans, which would have further stemmed the avalanche of credit-default swap payments to investors betting against mortgage holders.
The situation in China over the last decade has been almost comically reversed. Throughout the 2000s, the Chinese savings rate increased, topping out at 38 percent in 2010, one of the highest in the world. Those subprime NINJA (No Income, No Job, No Assets) loans that were all too common in the United States during the boom years would be unthinkable in China, where buyers are required to pay as much as 50 percent of the asking price up front. When the chickens come home to roost, the blow will not be mortal because the Chinese will be equipped with enough personal equity to weather the downturn, and the banks will not be overextended.
In 2003, Warren Buffett declared the increasingly ascendant derivatives market to be the work of "madmen" and "financial weapons of mass destruction." And in the end, the Oracle of Omaha was right. Overleveraged CMO's and the wildly unregulated credit-default swaps turned out to be particularly devastating. Billionaire investors like John Paulson may have made a killing betting against them, but for the vast majority, they spelled disaster.