Valuation

Is China A Bubble?

For an economy of 4.814 trillion dollars nominal GDP, it is unusual to digest the news of its bubble burst. Doubts are often raised about whether it will simply be a correction due to the present overheating many are believing or a bubble only to burst and shake the world markets. Whatever be the case but we are not ready to take the bad news from China after Greece.

If we start with understanding how the bubble was created, may be we can draw some interpretation about the China’s future. With the recent economic crisis hitting world economies, the overcautious Chinese government took steps like giving stimulus packages to the extent of 575 billion dollars which is 15% GDP. Also cheap money was made available in the forms of loans of 1.4 trillion dollars in 2009.This huge amount of stimulus spending and lending found its way into real estate. The private real estate companies took loans to build office spaces, retail housing, etc. which only rose the price of the real estate. The expansion in the industry was so massive that property and construction constituted 10% of China’s GDP. The home prices in 70 cities rose by 12.8% in the year to April 2010.The total sales value of homes touched 384.6 billion Yuan with 72.4 million square meters of sold floor space. The foremost indicator of a bubble which is the ratio of average home prices to average annual household incomes is ten in China whereas in most developed countries it is only four or five.

But on seeing the other side of the story , the situation doesn’t seem to be that worse. As an example the mortgages though grew by 53% in the year to March 2010, the housing loans/GDP is still 15.3% which is very small if compared to what US had during the crisis. Moreover, the mortgage as a percentage of value of homes is limited to less than 50%. Further the prices of the real estate grew extensively in big cities like Beijing, Shanghai and Shenzhen whereas the tier 2 and 3 cities still don’t have...