Growth of China’s Economy

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It is obvious that within the past two decades China’s economy has grown. It has become the second largest economy in the world which was because of government initiatives into encouraging foreign direct investment, local entrepreneurship and real estate development within the country.

Also, the outsourcing industry has helped in improving the Chinese economy within the past 20 years causing rapid development and expansion of cities and factory complexes in China.

It was seen though in the study of Country Report (2011 ) which looked at the 70 million housing surplus units within China showed that most if not all if these units had price schemes well above what an average Chinese worker would be capable of affording (Economic forecast, 2011: 7).

In looking at the case of Country Report (2011) the rapid economic growth and development within China came also with an equally good expansion of China’s real estate with hundreds of thousands of construction projects expected to reach their completion periods by the end of 2012 – 2015.

The problem as explained by Country Report (2011) is that while there is a high rate of property development that is happening within Chinese cities there is a lot of housing surplus within the country with well over 70 million surplus housing units at the present.

The problem when looking at this situation based on the findings of Country Report (2011) is that while having housing surplus would be fine if such housing were created in order to meet expected demand within the near future the problem is that what is being made is not housing or subsidized housing schemes which are in great demand within China due to a lot of urban poor and urban workers but what is being made is high end property development which few people can afford.

Another way of looking at this issue is through the article of Lan (2011) which looked at changes in China’s social development. Lan (2011) points out that within recent years, as result of China’s increasing manufacturing industry, a relatively new segment of the population developed as a direct result of China’s progressive economic growth and development over the past 20 years and as such has come to become an influential factor in the local economy (Lan, 2011: 47 – 49).

The problem as indicated by Lan (2011) is that this relatively new upper class is unfamiliar with the concept of wealth and privilege and as such have actually modeled their spending habits on that of the western world. It was seen in various instances that they spent a lot of money recklessly, lavishly and usually concentrated these purchases on high end real estate.

Data released by the Boston Consulting Group has estimated that the number of affluent/ middle class households within China will reach roughly 130 million by the end of 2020 (Lan, 2011: 47 – 49).

What is seen though in the case of China, as explained by Lan (2011) is that real estate development within the country has been that same as that of the affluent/middle class population growth but instead has gone past it with nearly 70 million homes/apartments meant for that particular population segment already having been built.

In the case of tier 2 cities Bennet (2002) explains that “the housing backlog (referring to the amount of unsold surplus units within buildings) was set for 1 year as determined by the developers during the initial phases of construction however in cities similar to Qingdao such as Dalian and Wuhan the housing backlog has reached 7.5 years to 8 years” (Bennet: 2002: 1).

A clarification of this particular statement by Zhang (2011) is that during project planning and construction developers thought that the apartments units that they had built would have been sold out within one year of construction yet the end result was that 2 to 3 years after construction barely 20% of units within apartment complexes in cities such as Qingdao were sold resulting in an excess in the amount of products present.

This particular problem is which is further worsened by the fact that even more properties are continuing to be built which few people can afford (Zhang, 2011: 514).

The problem with this is that there are too many homes versus too few people willing to buy which creates a potentially bad situation for China since up till this day construction projects of new homes continue to increase despite no one buying or too few people with money able to actually afford such places.

Shedding more light on this situation is the study by Wang et al. (2011) which looked at average home prices within China’s cities and the average salaries of workers within China.

Wang et al. (2011) showed that the average median home price within the country is equivalent to $114,900 while an average worker earns 2,000 to 4,000 Yuan per month and within an average year they could earn 24,000 to 48,000 Yuan.

Using XE.com to examine the current exchange rate it was seen that $114,900 is equivalent to 734,170 Yuan, as of the November 2011 exchange rate. When deducting the average cost of expenses that an ordinary Chinese worker has it can be seen taht it would take them a very very long time to earn even half of what is needed to buy even an average home with China’s current cities.

The underlying theme of Country Report (2011), Lan (2011) and Wang et al. (2011) is that there are too many surplus housing units within China since they focus too much on catering to the upper class instead of the lower class and the lower class is unable to buy because of the high prices.

This is connected to China’s current position in the multilateral trading system since as seen in the work of Zhang (2011) China has been using its current construction boom in order to artificially increase its GDP. The problem with this situation as explained by Zhang (2011) is that there is a limit to how much artificial GDP increase can be done which China has already clearly exceeded.

This leaves the country at the threshold of a possible real estate bubble burst which the Chinese economy must fix before things get much worse within the immediate future. The problem with China becoming a responsible stakeholder in the current multilateral trading system is that it would have to impose certain reforms in order to be considered “responsible”.

First and foremost among these possible reforms are issues regarding its manufacturing industry and its devaluation of its current currency.

Consumer Reports (2008) examined the spread of copied goods coming from China, it showed that the spread was a direct result of the outsourcing industry that China’s manufacturing industry was able to grow as fast as it did compared to other countries since China didn’t need to wait for technologies to develop within the country but rather copied the necessary technologies and processes needed to market their own goods (Real or FAKE, 2008: 12).

What must also be taken into consideration is the fact that due to the low cost of doing business in China local manufacturers that copied the technologies and processes of companies that had outsourced to China were able to undercut prices resulting in situation where more international consumers chose to buy from these new companies due to the relatively lower prices for the same product.

It must also be considered that China’s manufacturing infrastructure as well as the various manufacturing technologies and processes that were brought into China by various multinational companies that were copied by local manufacturers enabled them to produce the same type of product at a lower cost.

The Economist (2010) states “it was the culmination of these events that brought about the development of a new Chinese upper class composed of businessmen and entrepreneurs that increased local demand for high end real estate development as well as high class foreign goods” (Safe as houses, 2004: 41).

One of the current negative issues regarding China has been the issue of technology stealing, undercutting prices and the cheap labor in order to overwhelm markets. Based on the facts presented so far it can be seen that such practices have actually greatly benefitted China.

If China were to become a responsible stakeholder in the current multilateral trading system it would need to implement reforms in order to ensure such practices are either abolished or limited in some way. The problem with doing so is that this would affect China’s local economy which is dependent upon the manufacturing industry to continuously churn out large amounts of goods.

Any slow down in the manufacturing industry would affect the current real estate market thus bringing about a housing bubble burst that would negatively affect China’s economy.

The same can also be said of China’s currency, if China were to correct it’s obviously undervalued currency the result would also create negative effects in the manufacturing industry which will also trigger another housing bubble from collapsing.

Becoming a “responsible stakeholder” in the current multilateral system involves having to conform to distinct guidelines, trade rules, international agreements as well as a variety of other possible regulations that would definitely affect China’s local economy.

You have to question whether a country would intentionally cause a widespread economic collapse within its borders all for the sake of “playing nice”. Another way of looking at this is by examining China’s previous course of actions over the past 50 years.

It can be seen that even in terms of being a “responsible state” it has considerably diverged from that due to reports of humans rights abuses, the limitations of human rights as well as an assortment of other questionable activities.

Even when China became a manufacturing hub for a large percentage of man-made products it as continued to disregard rules regarding the proper disposal of industrial waste as well as limiting the amount of C02 being released into the atmosphere.

Overall the country has continue to flagrantly disregard a lot of international rules all for the sake of continuing its activities. Now when taking into consideration the facts presented by the three articles presented in this paper it can be seen that not only has China not been a “responsible stakeholder” in a large percentage of its international actions but it seemingly only pursues actions which are to its benefit.

Thus, when presented with a situation such as a potential housing bubble burst should anything happen to its local economy it is can be stated that based on its previous history alone of non-compliance it is obvious that China will not be a responsible stakeholder in the near future.

One way in which China has been attempting to fix this issue is to implement stricter building policies however this has yet to actually affect the sheer amount of excess housing units within China.

In order for this to actually be resolved China needs time in order for either the units to get cheaper or for the government to come up with a way to fix the current housing problem.

As such it is very unlikely that China will seek to become a responsible stakeholder in the current international system but rather will continue along a route of destabilization since this is the only way it can prevent its local economy from collapsing under the weight of so many excess housing units.

Conclusion

Based on an examination of the articles published in 2011 as well as the various articles utilized in supporting their arguments it can be seen that their underlying theme has been China’s overexpansion into high end property development within its local real estate market despite a majority of the demand being in affordable housing settlements.

While this particular action was in part precipitated by assumptions that China’s growing elite would buy the new properties the fact remains that estimates show that too many projects were built too quickly which many experts now agree could result in the worst real estate collapse in history.

Furthermore, due to the fact that any subsequent interference in China’s local economy would cause the housing bubble to burst it is unlikely that China would proactively become a responsible stakeholder in the current multilateral trading system since this would result in a devastating blow to its local economy which China doesn’t want.

Reference List

Bennett, JT 2002, ‘The Minimum Wage: Some New Evidence’, Journal of Labor Research, 23, 1, pp. 1-2, Business Source Premier, EBSCOhost.

‘Economic forecast’ 2011, Country Report. China, 5, p. 7, MasterFILE Premier, EBSCOhost.

‘Home truths’ 2010, Economist, 395, 8684, pp. 73-75, Academic Search Premier, EBSCOhost.

LAN, X 2011, ‘China’s West: Generating Change’, China Today, 60, 4, pp. 47-49, Academic Search Premier, EBSCOhost.

‘Real or FAKE?’ 2008, Consumer Reports, 73, 1, p. 12, MasterFILE Complete, EBSCOhost, viewed 3 ‘Safe as houses’ 2004, Economist, 371, 8377, p. 41, MasterFILE Premier, EBSCOhost.September 2011.

Wang, S, Yang, Z, & Liu, H 2011, ‘Impact of urban economic openness on real estate prices: Evidence from thirty-five cities in China’, China Economic Review (1043951X), 22, 1, p. 42, MasterFILE Premier, EBSCOhost.

Zhang, X 2011, ‘Social risks for international players in the construction market: A China study’, Habitat International, 35, 3, pp. 514-519, Academic Search Premier, EBSCOhost.

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Growth of China’s Economy

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