On March 1, the automatic budget cuts – or the sequester – kicked in. Days before that, there were many discussions on how this would affect the economic recovery in this nation and all around the world. On March 4, “60 minutes” released a new program titled “China’s real estate bubble.” The program showed big ghost towns in China, making it look like China is on the edge of similar crisis to the United States’ 2008 financial crisis.
When America, the largest economy, starts to exercise budget cutting techniques, China, the second largest, is forming a real estate bubble. This time, both U.S. and China are heading in directions that create huge uncertainties for the world economy. However, those uncertainties don’t necessarily mean disasters. Both circumstances may seem scary, but, in reality, they also reflect huge potentials in both economies.
First, let’s take a look at the U.S. economy. Since the 2008 financial meltdown, the U.S. economy has been in recovery. If we compare the U.S. economic performance with other industrialized economies, we should be happy and encouraged. According to the U.S. Department of the Treasury, by the first quarter of 2012, the real GDP in the eurozone, UK and Japan hadn’t gone back to the pre-crisis level yet. Germany is a special case in Europe, but after recovering to the pre-crisis level, its economy didn’t perform as strong as the American economy.
If we analyze the U.S. economic performance in more detail – from the second quarter of 2009 to the first quarter of 2012 – the economic growth is mainly fueled by personal consumption expenditure, gross private domestic investment and exports. As often as we hear stories about the U.S. international trade deficit, we ignore the positive impact of the export.
In fact, government investments and consumption have been cut a few times in the past few years. In the first and fourth quarters of 2011, government expenditures cut back pretty significantly. However, the fundamentals of the U.S. economy, which are consumption, private investments and exports, are strong. As a result, the economic growth hasn’t suffered any long-term consequences.
We don’t have any statistics to analyze the impact of the sequester yet, but the stock market responded positively. According to the Guardian, by Friday, March 8, the Dow Jones Industrial Average, after its “six-straight daily gain,” had achieved 14,397.07, which is its new record high. The Dow Jones reflects investors’ attitudes toward the economy. If the investors are happy and optimistic about the future economic performance after the sequester, shouldn’t we just sit back and relax? If the economy can be compared to a roller coaster, the investors are the people sitting at the very front. They see the changes in the ride first. If they are confident about the future, then we should just enjoy the ride.
Now, let’s look at China’s economic situation. We know the U.S. economy is improving. However, if you take a look at the World Bank data, you may think the Chinese economy didn’t experience any crisis at all. From 2008 to 2011, the Chinese economy maintained its growth rate at 9.6 percent, 9.2 percent, 10.4 percent and 9.3 percent respectively. No doubt a portion of the growth is fueled by heavy investment in infrastructure and real estate projects. According to CBS news, 20 to 30 percent of China’s GDP is supported by their real estate projects. In addition, China is keeping a pace of building 100 to 120 cities a year. What’s more, some of them are now ghost towns. This worries many people. It looks very similar to the housing bubble in the United States – too much supply in the real estate sector. However, if we pay close attention to the data, we will feel less worried. According to the CIA World Fact book, China’s GDP in terms of purchasing power is about 12.38 trillion U.S. dollars. Conservatively, we can assume 30 percent of China’s GDP is supported by real estate projects. Theoretically, it means that in 2012 there was an additional 4 trillion dollars worth of condos, offices, shopping malls and the like. With a population of more than 1.3 billion people, each Chinese citizen only got an additional $3,000 worth of real estate property on average last year.
China and the U.S. are similar-sized territories. However, the population in China is four times more than the population in the United States. Mathematically, we can assume the real estate price should be at least four times more expensive in China than in the U.S. However, in terms of purchasing power, the average income for Chinese is about one fifth of the average income for an American. Adjusted with the actual economic value and income difference, the price of real estate property in China should be on the similar level with the U.S. However, if we look at the latest available data provided by Lincoln Institute of Land policy, in 2000, for home real estate alone, the average American occupied about $45,900 worth of property.
For the sake of argument, if the value of real estate asset is allocated evenly among the home, office and shopping mall categories, then in 2000 each American enjoyed about $137,700 of real estate property. In this case, the additional real estate property each Chinese person will enjoy after 2012 is less than 3 percent of what Americans enjoyed in 2000. Given the fact that these types of investments in China didn’t really start until 15 years ago, China still has a long way to go to build up infrastructure and real estate properties. Building 100 cities a year may not be sustainable. However, in the next 20 to 30 years, there should be enough demand in China for those properties.
Based on the analysis above, we should have more optimism than pessimism in the future of the economy. Investors are pleased about the budget cutting in the U.S. And average Chinese citizens shouldn’t be opposed to occupying more real estate properties. Nevertheless, there always will be uncertainties in both economies. At least we know the economies are doing OK now, or not as bad as some people have suggested.
Jiajun “Abe” Xu is a double major in finance and economics. Contact him at opinion@dailynebraskan.com