A few months ago China expert Nicholas Lardy dismissed concerns that China could be facing a problematic property bubble. Now, he’s changed his mind. Lardy now has said that a housing downturn in China could produce a “major, major economic correction” in China thanks to the country’s “massive stimulus spending and lending” in 2009 and 2010. This spending has created a price elevation that many economists consider unsustainable, and, furthermore, many believe that China’s entire economic system “routinely produces bubbles and is unlikely to change any time soon.”
Chinese economist Wang Tao predicts that in the next three to five years, housing prices in China are likely to jump again because there simply are not many other investing options in the country. Also, local governments rely heavily on land sales for revenue, which will make it tempting to continue supporting the boom with government money. However, the cycle is likely, Tao says, to “go bust” at some point. Others like Lardy predict the end will come much sooner, and believe that the bust is waiting only on the start of an inevitable “big sell-off.”
If the Chinese bubble breaks, it could have a very negative impact on the Chinese banking system – just as similar events have had in Japan and the U.S. How do you think this might affect our own economy?
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