Is China's Economy Going to Crash?

 Shanghai's Pudong Skyscrapers

(Source: Jens Schott Knudsen)

Recently the KLSE and the regional stock market seems to be moving in the downward trend triggered by the news of China's tightening of credit. Many investors are afraid that such move will hamper the global economy recovery process.

Will the tightening of credit by the Chinese government cause China's housing bubble to burst? Will this then causes China's banking system to crash and which then causes its whole economy to depress as what happened to the US's economy in 2007/2008?

Let's take a look at what other economists are saying in this article.

I would like to quote some of their points here:

"Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come."

"One of the legacies of China's prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards," Koyo Ozeki said in a report published by Pimco. "It will likely take a considerable period of time for supply to catch up to demand." That wasn't true in the Japanese or U.S. bubbles.

Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.

In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.

Moreover, China's homeowners carry less debt than homeowners abroad and the economy's rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide."

I personally view that the current move of tightening of credit in China as a healthy move to prevent the housing bubble from bursting too soon.

Back on the KLSE, regardless of whether the China's housing bubble is going to burst soon, as a long term investor I see this as an opportunity for 'bargain-hunting' for undervalued shares ;-)