The China Transformation and the Real Estate Bubble (2014)

AbstractThe real estate boom in China has to be seen in the greater context of an economy in transition. The tremendous growth rate of GDP over a period of more than three decades has created demand for industrial and private development in the building industry. The rise of a middle class added to the demand for housing, especially in urban areas. Easy credit during the financial crisis of 2008-2009 has further stimulated construction. The Chinese government is trying a measured approach to maintain growth without causing inflation and at the same time, control excessive real estate development.Keywords: China, real estate boom, excessive development, middle class demand, government policies.IntroductionChina's real estate bubble has to be seen in the greater context of an economy in transition. Since the economic reforms, first introduced in 1978, the Chinese economy has experienced exceptional growth. The influx of billions of dollars in foreign direct investment helped to build a huge export industry but also contributed to a building boom. The rapid growth of GDP for more than three decades helped to bring millions of people out of poverty and into the middle class, creating a tremendous demand for housing, especially in urban areas.When examining the real estate boom, many factors come into play. There are noticeable differences between urban and rural development; there are credit conditions. The mies and regulations vary between central and local government, so does the treatment of state-owned enterprises compared to private businesses. Entrepreneurial firms do not have access to the formal banking system but have to finance their credit needs in the underground financial system. The savings habits of Chinese households play a role contributing to the demand for real estate investments.This study attempts to touch on many of the factors mentioned above and to explain the influence of external and internal forces on the Chinese economy regarding the transformation and the real estate bubble. The central government, trying to maintain solid growth of GDP without causing inflationary pressures, is discouraging overinvestment in real estate without causing deflation and is fine-tuning policy measures in the attempt to adjust to changing external and domestic conditions.MethodologyA significant portion of this research is based on structured conversations with more than 350 key influencers in Shanghai, Beijing, Hong Kong, Singapore and Washington D.C. over a period of 22 years beginning in 1988 and most recently in the summer of 2012 and spring of 2013. Interviews in the summer of 2010 were conducted with experts from the Royal Institute of International Affairs and the School of Oriental and African Studies both in London, The Council on Foreign Relations in New York and Imprimatur, a private investment firm in London. A significant effort has also been made to examine traditional data and documents from a variety of sources when and where they were available. In 2012, research was conducted in Hong Kong, Guangzhou, Shanghai and Beijing. In spring of 2013, one author spent six weeks at Shanghai Finance University conducting research and teaching. The research findings relate to management transparency. It is important to note that many of the professionals and experts in China wish to have their comments kept confidential. Therefore, we chose to respect their request of confidentiality in all cases.The methodology for this study where it involves interviews can be described as an emphasis on the policy views of key stakeholders and influencers. In general, the interviews were conducted with senior analysts, corporate officers and professionals. In addition to experts from the above listed institutions, other institutions included analysts from such organizations as the Economist Group in Hong Kong, Shanghai and London, the old Bear Stems Investment firm, Goldman Sachs, Chase Investment Bank, U. …