Property is a big driver of Chinese economic growth, and runaway investment in the real estate sector has contributed to signs of a broader overheating. The economy grew by a red-hot 10.2 percent (annualized) in the first quarter of the year from a year earlier, when it grew to the tune of 8 percent per year. Concern about too-rapid growth has prompted the government to raise bank lending rates by 0.27 percentage points last month to discourage borrowing and reduce investment. Officials fear that overheating could lead to a sudden economic crash. Additional measures are in the wings, including hefty increases in property taxes, again to take aim at property developers who hoard land and buildings, a practice that creates artificial shortages and drives up prices
Scarier still is the social unrest that the leadership fears if the economy does not slow down to more manageable levels. This is due to a growing imbalance of wealth rampant in China’s population of 1.3 billion people, wherein thirty-five percent of the population lives in the cities and sixty-five percent inhabits the countryside. There is a system of residence controls, so that if one is lucky enough to be born in a city – and registered as a city dweller – it is easier to get into university or to work at all the large companies and government agencies in the city. If, conversely, one is registered as a rural person there are very severe restrictions on where he can live and work. And this is actually the biggest human rights problem in China today. The majority of this population of 1.3 billion people consists, by law, of second-class citizens who live for the most part in conditions of abject poverty, in rural huts many of which do not even have running water. One can imagine how these people feel when they look at the way their urban counterparts live.
The economic ripples and effects that a speculation in grand style such as this have on market wealth are indeed humongous. Market wealth is defined as ‘the combination of materials, labour, land, services and technology in such a way as to capture a profit’ (Adam Smith). The aftershocks of a bubble of this size that bursts are usually terminal and irreversible: market wealth disappears, it vanishes entirely. And it takes forever to re-build it, right from scratch. Here in the West, the greatest example in recent times is the infamous Black Monday – October 19, 1987 – when the Dow Jones collapsed 22.6 percent in value in a single day! It took nine years for Wall Street to lure investors back.