Could China be next?

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It is an undisputed fact that China’s economy has been booming beyond recognition. Unprecedented growth rates and out of this world building construction (Shanghai wouldn’t look out of place in any science-fiction movie) have led to a country which is unrecognisable from twenty years ago – well, the cities anyway. All of which has stunned the world.

But have we all taken our eye of the ball and given China more credit than it deserves?

In an economy which has somehow managed to combine an essentially autocratic regime with the tacit government blessing of the use of market forces, it has been an extraordinary success story, which would seem to be a contradiction in terms. A communist government, supposedly in it for the benefit of the masses, allowing activities which so far only seem to benefit the few. You’d think that would lead to some kind of social and political unrest. On the contrary, the Chinese psyche and history is far more complex than that, and a few protesting students (mercilessly dealt with in the past) are not going to change the views of the public at large. And in any case, who wants to bother about pesky things like human rights when you’re making good money, right?

This, added to a previously unquenched thirst for business success and material wealth amongst the emerging middle-classes, has led to a Chinese property boom which has thus far left the West in the shade. But is it all about to come to a shuddering halt? Well, the writing is certainly on the wall. Only recently, the Shenzhen region (one of five designated special economic zones) has seen house prices drop by around 30 per cent. Additionally, there is genuine concern that certain Chinese banks and other financial institutions have been quietly writing off debts incurred after some dubious lending to even more dubious investment syndicates. Sounds like the US sub-prime situation? Frankly, yes. The exact mechanisms might be different, but the end result could be the same – banking and regulatory crisis.

However, the extent of any problems may not be immediately apparent – the communist government is less likely to make as much of a hullabaloo about bailing out a bank as the US has; the state is more or less in control of everything anyway. But the fact remains that reduced confidence would hit that part of the Chinese economy that has been opened up to competition and market forces. By the way, for those of you who entertain the idea of Chinese property investment, you should know that foreigners are not permitted to buy property there without a residence permit and a work permit, both of which are extremely difficult to come by. It’s a deliberate policy aimed at clamping down on the activities of foreign speculators, who initially thought China was going to be the new Shangri-la.
But the world economy is more inter-linked than ever before, and no economy has been completely shielded from outside influence (well, ok North Korea has had a go, and the result has been wholesale reliance on external food aid). It will be fascinating to see how China copes with any predicted downturn. We could be entering even more unprecedented times. Watch this space…

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