Image Courtesy : financialpost
China’s economy has been on a rocky path since the global financial crisis of 2008. Many observers have decried the existence of massive excesses in property investment, warning the country’s economy is too reliant on a property bubble that is waiting to burst. Yet China marches ahead. In April, The Financial Times estimated that, for the first time since the 1870s, this year China will be the world’s largest economy, supplanting the United States.
There is massive over-investment in property across China, for example- one observer recently told that apartment builders in Beijing do not even bother finishing the buildings because they sell the properties to investors, not consumers who are looking for a home. The existence of vast, uninhabited ghost towns and vacant shopping malls springing up across the country has been widely documented.
This tendency is reflected in the fact that China’s widening income inequality has surpassed that of the U.S. This is because when profits are high and workers’ savings are low, most of the wealth generated accumulates with the upper classes. Because of the structure of income distribution in China, a massive stock of wealth has been created at the top end of China’s economy. This probably accounts for anecdotes such as builders turning over half-completed apartments blocks to investors. These investors have too much cash on hand and will buy up large properties even if they don’t generate immediate returns on investment.
Thus the wide disparities of income and the fact that China is developing at an extremely rapid rate are two sides of the same coin. Because of the relatively low worker saving and consumption rates, capital, in the form of housing, buildings and factories, can accumulate at whirlwind speed. But this gives rise to a troubling dynamic similar to a spinning top: In order to keep the economy moving, investment spending has to continue to generate sufficient demand for goods and services. If the rate of investment starts to slow, the top could quickly grow unstable and wobble.
In the meantime, since goods in China are relatively cheap, workers can still be kept content. Factories produce massive amounts of inexpensive products for export to foreign markets. Any surplus is then dumped in local markets at cutthroat prices. This ensures that the extremely low nominal income of the Chinese worker can go a very long way.