Conventional wisdom holds that China is on the ascent and the United States is in decline, that China’s economy is roaring with raw energy and that Beijing’s “Belt and Road” mega-project of infrastructure building in Central, South, and Southeast Asia is laying the basis for its global economic hegemony.
Some question whether Beijing’s ambitions are sustainable. Inequality in China is approaching that in the United States, which portends rising domestic discontent, while China’s grave environmental problems may pose inexorable limits to its economic expansion.
Perhaps the greatest immediate threat to China’s rise to economic supremacy, however, is the same phenomenon that felled the US economy in 2008—financialization, the channeling of resources to the financial economy over the real economy. Indeed, there are three troubling signs that China is a prime candidate to be the site of the next financial crisis: overheating in its real-estate sector, a roller-coaster stock market, and a rapidly growing shadow-banking sector.
China’s Real-Estate Bubble
There is no doubt that China is already in the midst of a real-estate bubble. As in the United States during the subprime-mortgage bubble that culminated in the global financial crisis of 2007–09, the real-estate market has attracted too many wealthy and middle-class speculators, leading to a frenzy that has seen real-estate prices climb sharply.
Chinese real-estate prices soared in so-called Tier 1 cities like Beijing and Shanghai from 2015 to 2017, pushing worried authorities there to take measures to pop the bubble. Major cities, including Beijing, imposed various measures: They increased down-payment requirements, tightened mortgage restrictions, banned the resale of property for several years, and limited the number of homes that people can buy.
However, Chinese authorities face a dilemma. On the one hand, workers complain that the bubble has placed owning and renting apartments beyond their reach, thus fueling social instability. On the other hand, a sharp drop in real-estate prices could bring down the rest of the Chinese economy and—given China’s increasingly central role as a source of international demand—the rest of the global economy along with it. China’s real-estate sector accounts for an estimated 15 percent of GDP and 20 percent of the national demand for loans. Thus, according to Chinese banking experts Andrew Sheng and Ng Chow Soon, any slowdown would “adversely affect construction-related industries along the entire supply chain, including steel, cement, and other building materials.”