China Research

Currently, there is an intense discussion going on whether there is a bubble on the Swedish real estate market or not. But this question should not be the point anymore. In my view, there is already a bubble without any doubt after all these years of credit boom and enormous price increases on this specific market in mainly major Swedish cities.

The question is instead whether this bubble will burst or not. Children know about this distinction when producing bubbles with their chewing gums. They want the bubble to burst by inflating it further. Financial analysts, however, have many times no feeling for such a necessary distinction between the existence of a bubble per se and its possible bursting.

So, why does the Riksbank – not literally spoken – refuse to apply this bubble phenomenon taken from the world of childhood? They do, of course, hope – unlike most children – that the bubble within the forseeable future will diminish more or less by itself and/or by the already visibly weakened Swedish currency – preferably without a major explosion, of course.

Is this, however, still possible under current overheating conditions? May be not. Probably, something drastic must happen to deflate the existing bubble on the Swedish real estate market, whatever the tool or the triggering event may be.

Moving the analysis to the Far East, China is another country having a real estate bubble right now, both what regards residential investments and the commercial real estate sector (city offices and industrial parks). Concerns (should) still increase.

What we do know from history is the fact that it normally takes quite some time until a bubble on real estate markets finally bursts – but also that the consequences of such a bursting bubble tend to be severe and long-lasting.

A very micro-oriented observation may be illustrative. I recently had the opportunity during a flight to read a leading Hong Kong-based newspaper completely from the first to the last page. One micro-oriented article was striking me particularly.

This article was about massive property sales of an extremely rich Chinese tycoon (on the highly-valued Shanghai market). He had simply concluded that the risks on Chinese real estate markets had become too high.

Ten years ago, the same tycoon paid around 3000 yuan for one square meter in this specific Shanghai project. Now it is noted that square meter prices in neighboring locations have been soaring up to 50 000 yuan. What a bubble! It may burst – or not. But risk-upgrading is still in place.

Sometimes, micro observations can cause or strengthen real macro concerns …

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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In the past few weeks, I met quite a number of Chinese economists at different places and conferences.

Totally, some topics were really dominating. Below, I give some brief summery of three points that have been most frequently mentioned and discussed – and of two topics that should be in the headlines:

1. The “One belt, one road”-investment plan

Clearly, the Chinese are very enthusiastic about their mega-infrastructure project “One belt, one  road” from China to Europe (Silk Road Economic Belt & Maritime Silk Road). This major investment  program is assumed to boost the domestic Chinese economy substantially. But the Chinese also emphasize that benefits will reach Western Europe. How much this really will be the case remains to be seen However, it should be said that the (Swedish) press and potentially involved companies in Sweden and other countries should have a regular eye on developments of the Chinese “One belt, one road”-plan – despite the uncertain dimensions of this project.

2.  The deterioration of U.S.-China relations

There is no doubt that the political relations between the United States and China have been deteriorating more recently. The absence of a red carpet at president Obama’s arrival to the G20 summit in Hangzhou was mostly symbolic. The underlying problems, however, are currently much deeper and more fundamental.

3. China is really concerned about Europe/the EU

China’s uncertainty about Europe/the EU and investments and sales there has obviously been increasing in the past few quarters – and even more after the British exit voting. Europe/the EU have lost recognition in China, at least currently.

4. Insufficient knowledge about the current status of Chinese economic reforms

It seems to be striking that many Chinese economists are so little informed about all the ambitious reform plans from the Third Plenum –
and how much has been achieved so far. Transparency seems to be lagging  substantially. This can be considered as a serious shortcoming. How are current short-term growth stimuli related to the planned structural reforms? No answer has been given.

5.  No comments at all on the future composition of the Standing Committee

It’s no real surprise but I have not heard any comment on next year’s new appointments for the Politburo Standing Committee of the Communist Party, the most important political body in the People’s Republic and, consequently, for economic policy. My own feeling is that president Xi Jinping will strengthen his position in this crucial decision-making forum after the fall of 2017.
 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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