Property Bubble
So the question arises that despite so much ‘development’ why is China under so much scrutiny? Why are experts saying that China may soon face an economic crisis? To understand this, let’s look at the total wealth of China. Let’s see its breakdown. Globally, 35% of the wealth is in the form of land. 33% in houses and other buildings. So about a total of 68% of wealth is from real estate.
But for China, this number is at 78%. If you compare this pie-chart with an individual’s wealth then there is nothing unusual here, this does happen. Most of the wealth of a person is in the form of the property he holds. His lands, his real estate. So 60%-70% of a country’s wealth in the form of real estate is not unusual. But what happens when I tell you that you overestimated the value of your property?
You feel that the value of your property should be ₹100 million, but in reality, it is only ₹10 million. Since you aren’t actually selling your house, you won’t come to know about this. When you’ll go to sell it, you’ll find out the actual value of your property. The same thing is starting to happen in China. A real-estate bubble is being formed in China.
A bubble in the finance sector about how bubbles are formed in the stock market. It basically means that the actual price of something is low, but the speculative price of it is very high. It begs the question, why did this happen in China? The State Capitalism of the Chinese government plays a big role in it. The Chinese central government had set targets for the local governments for the minimum GDP growth rate in their regions. So the local governments were under a lot of pressure. Because it is a dictatorship in China.
The central government strictly sets the standards of the performance failing which, the officials lose their posts. So the local government were under a lot of pressure to bring in a certain GDP growth rate, and the saw that the easiest way to do this is by more and more buildings and constructions. And thus inflating the real estate prices. It was done to such an extent, the construction was so rapid, that real estate made 29% of the contribution to the annual GDP of China.
