Daniel Stelter is the founder of the discussion forum beyond the obvious, which specializes in strategy and macroeconomics, and is a management consultant and author. His podcast goes online every Sunday at www.think-bto.com.
(Photo: Robert Recker / Berlin)
From 2015 to 2019, China was Germany’s largest trading partner. With a turnover share of 15 percent, that is almost 200 billion euros annually, China is the second most important foreign market for the largest German listed companies. The most prominent example is the VW group, which sells almost every second car in China. Germany’s good economic development in the ten years after the financial crisis would have been inconceivable without the rise of China. It is all the more surprising to see the equanimity with which the bursting of the Chinese real estate bubble is acknowledged. The real estate developer Evergrande, with around 300 billion US dollars in debt, may go bankrupt, the communist government will never allow a financial crisis like the one we experienced in 2009. In case of doubt, more liquidity will also be pumped into the system in China, which will further fuel the global stock exchanges.
It is high time for us to realize that China is facing a real estate bubble of historic proportions that dwarfs those of Ireland and Spain in 2008 and even that of Japan in 1989. As Harvard professor Kenneth Rogoff calculates, the construction industry accounts for 29 percent of the country’s gross domestic product (GDP). Ten to 15 percent are considered normal.
Nowhere in the world is real estate as expensive as in Beijing, Shenzen, Hong Kong and Shanghai. 90 percent of real estate buyers already own one. After buying them, they usually leave the apartments empty and speculate on a further increase in value. This is the classic pyramid scheme. Debt has doubled since 2008 to more than 250 percent of GDP.
The political leadership is now trying to let the air out of the bubble in an orderly manner. This may succeed without a crash. But it will not come off without a negative effect on economic growth. Combined with the decline in the labor force, it will mean that we will have to say goodbye to the high growth rates of the past. The party’s measures against “capitalist excesses” are unlikely to be suitable for promoting the willingness to innovate, which, in turn, does not suggest any major leaps in GDP per capita. It is also unlikely that the world will accept China’s rising export surpluses.
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Germany has to adapt its own business model
Since the economy is less about the level and more about the change, this is very bad news for the local economy. Germany will have to adapt its own business model: less exports, more domestic demand is the solution. In doing so, we must be careful to use the resources in such a way that they contribute to securing future prosperity. Here too, China’s real estate bubble, which is ultimately destroying prosperity, warns us to be cautious.
More: “Financial debauchery will be punished” – The consequences of China’s new debt policy