The pandemic has pushed the global economy into an increasingly fragile state, and its fate no longer rests primarily on international cooperation, policy decisions, or even the handling of this health crisis. Instead, the world’s stability is in the hands of China’s housing bubble. A collapse of Chinese markets or a Chinese yuan crash would cause devastation far beyond the country itself.
After all, China has a capital account economy, as well as $40 trillion stored in bank deposits as of July 2020. This money moves between sectors–stocks, cryptocurrency, commodities, agriculture, and so on–but most frequently it flows in and out of housing. The Chinese government deliberately deflates and reinflates bubbles at will, and the housing bubble in particular has been pumped up again and again, seeing as how it is the most crucial asset in the eyes of China’s rapidly expanding middle class. Unlike the United States, which holds the majority of household net worth in financial assets, and less than 30 percent in real estate, the Chinese public have put approximately 75 percent of all the country’s household worth into real estate. As China emerged on the international stage as a major superpower, a prosperous global economy became inextricably linked to a stable (and inflating) Chinese economy. This means that the world is now just as dependent on the success of China’s housing market as it is on other major influences, like the US stock market. Now, China’s housing market bubble is larger than ever, and still expanding. In its present state, it far surpasses the housing bubble that dominated the US in the 2000s. Even during the peak of the American property boom, investors were injecting $900 billion per year into residential real estate. In China, that statistic was eclipsed in the 12-month period from June of 2019 to June of this year. In that time, nearly $1.4 trillion was pushed into housing. Furthermore, investments in Chinese real estate last month were the highest ever recorded. Overall, the value of Chinese homes combined with developers’ inventory reached a staggering $52 trillion dollar by the end of last year. That’s double the size of residential markets in the US, and the value even outpaces the entirety of the US bond market.
Overall, the value of Chinese homes combined with developers’ inventory reached a staggering $52 trillion by the end of last year. That’s double the size of residential markets in the US, and the value even outpaces the entirety of the US bond market.
In only several years, experts anticipate that China’s housing market will contain more value than all global stocks combined, about $85 trillion. That is in large part thanks to the Chinese government, as this particular market is treated as a special asset, and will keep expanding for as long as those in charge want it to. As a result, the value of houses in China must avoid even a slight drop in value, in turn forcing housing prices to skyrocket. It seems as though China’s middle class should know that they are only feeding more money into an already enormous bubble. But many buyers are afraid that the Chinese yuan will crash as a result of the economic turmoil around the world, and if the value of their currency plummets, housing serves as a safe haven. Therefore, Chinese consumers keep snapping up real estate despite the crisis. In the long term, this will accelerate the approach of an inevitable housing market crash, and such an event may occur even before the Chinese yuan collapse.
Now, the cost of housing in China–particularly in major cities–is nearing levels seen in some of the most expensive areas across the globe. The average cost of a home is 9.3 times higher than the average annual income received by a Chinese citizen. Even in San Francisco, widely considered one of the priciest places in the US for real estate, that statistic is only 8.4. The platform of false wealth built upon artificially inflated assets that is dominating the world’s two largest economies can only continue for so long. Soon enough, it will all–the stocks in the US and the housing markets in China–come crashing down.
Of course, matters will only be made worse if the superpowers continue to trade blows that have pushed US-China relations to their lowest point in decades. The global economy rests on the health and growth of both countries’ individual economies, and if either one falters, or if both collapse, the world will face a catastrophe unlike anything we can presently imagine.
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