Image: (APA/AFP/STRINGER)
Troubles in China’s housing market (which accounts for a quarter of economic activity) have been reported to threaten to plunge the world’s second largest economy into recession. Around 70 percent of private wealth is invested in real estate whose prices are falling. In addition, there is a shrinking population, high youth unemployment of 21 percent and geopolitical tensions. Sinologist Susanne Weigelin-Schwiedrzik from the University of Vienna attributes enormous importance to the real estate sector and warned in Zib2 against taking the crisis lightly: “I am surprised at analysts who describe this as a normal process.”
“Things always fail slowly before they break down,” agrees William Hurst, China expert at Cambridge University. In the short term, there is a significant risk of a financial crisis or an economic crisis of a different magnitude, which would bring very high social and political costs to the Chinese government: “At some point there will have to be a reckoning.”
Experts agree that China will not be able to avoid economic reforms and outline three options for getting out of the crisis: first, a quick, painful crisis that writes off debt, drains excess industrial capacity and bursts the real estate bubble.
The second option is a decades-long process in which China is gradually reducing the sins of the past – at the expense of growth. The third option is to shift to a consumer-centric model, with structural reforms that will hurt in the short term but get the country back on its feet faster. The active switch to a new economic model is considered very unlikely.
Both the government and the central bank have recently taken measures, for example to increase private consumption and strengthen the currency.
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