China’s Economic Bubble will Burst

After years of explosive economic growth, China’s bubble will burst within the next few years and it could take the United States’ economy with it. China has been one of the world’s fastest growing economies over the past three decades. China’s yearly GDP growth rate from 1978 to 2010 was a staggering 9.5 percent, boosting the global economy and lifting hundreds of millions of people out of poverty. As the world’s most populous country, China contributes a third of the world’s economic growth, according to The Wall Street Journal.

China’s economy surged past the United Kingdom in 2005, Germany in 2009, and Japan in 2010. Last month, the International Monetary Fund announced that China officially dethroned the United States as the world’s largest economy, ending America’s 140 year run.

The problem is that growth in recent years has been artificial. It started in 2009, when the Chinese government decided to pursue Keynesian economic policy in response to the global recession. Forbes columnist Jesse Colombo, a self-described “anti-economic bubble activist” explained on his blog all of the mistakes China has made in the past five years:

“China’s growth in the past decade has been overwhelmingly fueled by fixed asset investment (such as infrastructure development), which has further exploded since the launch of the 2008 stimulus program, accounting for more than 90% of economic growth in 2009. Over 100 extremely ambitious infrastructure mega-projects are currently being undertaken. Chinese cement consumption and construction spending has soared to truly bubble-like proportions as scores of extravagant and massive government buildings are being built in outer China, roads are dug up and rebuilt just to generate economic activity and cities binge on debt to build jaw-dropping infrastructure projects at all costs. China’s mad rush to build infrastructure projects has led to cut corners and shoddy workmanship, such as on the world’s longest sea bridge that was closed one week after opening due to safety problems, the much-publicized high-speed train’s disastrous crash and electrical problems and a new highway that collapsed after a test run.”

Essentially, China has largely avoided the global recession by spending an excessive amount of money on expanding the size of government. The national government did not pick up the entire tab. Local governments are also on the hook, which made credit rating agencies such as Fitch and Moody’s very worried. Cheng Siwei, a former deputy speaker of the People’s Congress, predicted back in 2011 that there would be “a very tough period” of stagflation thanks to a “subprime” credit crisis.

The “ghost cities” that have been built in recent years has led to a massive real estate bubble. There are miles of vacant apartments and houses. Skyscrapers are completely vacant. The mega city of Ordos was built to house up to a million people. Today, 98 percent of housing is vacant.

The world’s largest mall, New South China Mall, is still 99 percent vacant despite opening nearly ten years ago. The mall can accommodate 2,350 stores, making it the largest shopping center in the world in terms of leasable space. It’s over double the size of Mall of America in Minneapolis, the largest shopping center in the United States.

The Daily Signal reported in late October that China’s third quarter GDP growth was a weak, but healthy 7.3 percent. It’s the lowest in five years, but it is pretty unlikely there will be a contraction even if there is a massive bubble burst. However, the United States and Europe currently have very weak economic growth to the point where a significantly weakened Chinese economy can lead to a global recession anyway.

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