China's housing bubble challenge

PHOTO

A Chinese migrant worker in Shanghai. An economics research firm says one of the biggest challenges for the Chinese Government next year will be managing the country's housing bubble. [Reuters]

AUDIO from Connect Asia

Arthur Kroeber from Dragonomics examines the affect of economic stimulus on China's property boom

Created: 10/11/2009

Sheryle Bagwell

Last Updated: Tue, 10 Nov 2009 11:29:00 +1100

An economics research firm says one of the biggest challenges for the Chinese Government next year will be managing the country's housing bubble.

China's massive stimulus spending is fuelling a property boom, which has seen property sales increase by 85 per cent during the last 12 months.

In Shanghai, the price of new apartments has surged by almost 30 per cent.

The head of Dragonomics, a Beijing based independent economics research firm, Arthur Kroeber says Chinese authorities have a difficult balance to strike.

"Every time you get extra money in the system as you have now, that puts tremendous upward pressure on housing prices," he said.

"So I think that's going to be a major problem for the Government next year and they're going to have to come up with a new set of economic policies that balances the need for continued stimulus to boost growth while at the same time trying to keep housing prices under control."

Mr Kroeber says China's lack of an effective pension scheme is driving many people to purchase property.

"Individuals think of investments in property as their best insurance policy for old age," he said.

"So in addition to the pressure created by literally 10 or 15 million people moving into Chinese cities from the countryside every year and needing to be housed, on top of that you have this pressure from people already in the cities who want to buy their second house because that's essentially their retirement plan."

Mr Kroeber also say he believes China will have to become a more open society to sustain it's economic growth.

"There's no way for China to sustain fast paced economic growth over the long term without becoming a more open society, in a society where the government is more accountable to its citizens," he said.

"But having said that, I think that political development in China is going to be very slow."

"The endpoint is probably not going to be democracy as we're used to it. It will be some distinctively Chinese form of government that blends more openness and accountability with a much more structured and in some ways authoritarian system."