As real estate prices soar in the Chinese mainland, analysts around the world are yet again calling Chinese stocks a bubble. However, sky-high real estate prices aren’t always indicative of a bubble, and the fundamentals driving China’s economy higher have never been stronger.
China vs. the United States
The real estate bubble in the U.S. is entirely different than what is occurring in China. Chinese real estate is rising in price due mostly to a growing middle class. As this middle class continues to grow and consume, it is natural that there will be greater demand for housing among people who were previously priced out of the market. This is a natural effect of supply and demand.
The last real estate bubble in the United States was entirely different; there was no real growth in the middle class, and the only driver of demand was purely speculative investment. Instead of an influx of homeowners owning just one home, there were plenty of investors buying two, three, and sometimes ten homes – all hoping to catch an appreciation in value. As we all know, real demand from the marketplace never solidified, and housing prices took a dive.
The Export Economy
Despite a continuing recession, China’s export driven economy is still driving a huge annual trade surplus, bringing additional capital to the mainland. This too is inflating housing prices, as Chinese citizens save as much as 30-40% of their take home pay, which cycles through the banking system to create even more capital for investment and the purchase of property.
During the US real estate bubble, the United States was operating with a huge trade deficit, and annual savings rates less than 0%. (The average person spent more than they earned during the last decade long real estate bubble). The US real estate bubble was driven entirely by credit, not capital.
Capital is the Difference
Although Chinese stocks are falling as government controlled banks call back credit, the long term fundamentals of the Chinese economy remain sound. With so much capital ready for investment and a growing middle class ready to consume domestically produced products, the Chinese economy is in the best fiscal position of any country around the world.