Home prices tend to be driven by a combination of nominal incomes and the availability of mortgage credit. The phenomenal growth in Chinese nominal (and real) incomes during the past decades, together with easy credit, led to colossal increases in house prices and a resulting societal belief in the efficacy of houses as an investment. This was exacerbated by China’s huge credit stimulus in the post Global Financial Crisis period of the first half of the 2010s. With home ownership becoming increasingly unachievable for young Chinese, and home ownership becoming a major driver of wealth inequality, the Party-state understood that action was required to rectify the situation in a controlled fashion.
The result has been an on-again, off-again, housing market deflation as the Party-state manages what will be a multi-decade effort to shrink the massive property sector as a share of GDP and shrink home prices relative to nominal earnings. The great advantage that the Party-state possesses is the ability to grow the overall economy at somewhere near 5% per year, which with a stable population means that GDP per capita will grow at about the same rate. With policies to reduce income inequality, these yearly increases will tend to improve the incomes of all Chinese. At 5% a year, real incomes will double in 15 years and with a little inflation the rise in nominal incomes could easily be in the area of 150%. If during that period house prices are kept stable, or only increase a small amount every year in nominal terms, the Party-state will have successfully rebalanced the Chinese economy and made houses very substantially more affordable for the young.
Every year for the past few decades Western “experts” called for a crash in the Chinese economy with no such crash occurring. The Western experts may once again be frustrated as the Chinese housing bubble is slowly deflated by a Party-state that possesses an extremely high level of competence and greatly reduced levels of corruption due to the efforts of Xi. If the Party-state does successfully manage the rebalancing of the Chinese economy away from housing, and the current phase of technology and efficiency upgrading is successful, China will emerge in the mid-2030s as a dominant high-income economy. A shining example to the rest of the world of how to drive economic development and living proof of the utter failure of Western neoliberalism and the “development” policies pushed upon poorer nations.
With exponential growth rates, change can appear slow and then appear to be suddenly very fast. A good example is a lily pond where the lily pad coverage doubles every day from a very small base. For quite a while the rate of change appears slow, but then suddenly the pond goes from 1/8 covered, to ¼ covered, to ½ covered to fully covered in three days! This is what has been happening with respect to China, even though its growth rate is now slowing down. 5% per year is still exponential growth, and the next 10-15 years may represent that final doubling that completely removes Western hegemony and remakes the world order. The Western capitalist ruling class senses this, with the resulting desperate attempts to destroy Russia and undermine China’s economic development. Unfortunately for Western elites, and perhaps fortunately for the rest of the world, their own rapaciousness and incompetence has delivered them into a deeply unfavourable position.
The Ukraine War will end in a Russian victory, the only question is that of timing not of outcome. This by itself will deeply damage the ability of the West to shape the world, as its “mother of all sanctions and theft” efforts combined with a proxy war are seen to have failed miserably against Russia. This follows the abject failure of the West to manage COVID effectively and its humiliating retreat from Afghanistan. The European economies are now slipping under the waters of recession, with self-inflicted inflation remaining stubborn enough to warrant more increases in interest rates that will deepen the recession. The utterly mismanaged UK is at the epicenter of this, with interest rates having broken out to new highs above the crisis levels of last Autumn. The momentum is towards higher still, a poison for the debt-bubble known as UK housing. Rates are also jumping across Europe, promising a new European debt crisis to add to the recession. In the US, the economy has been kept above water by the large fiscal surge that got going in the fourth quarter of last year; now coming to an end. With reported inflation remaining “sticky” interest rates in the US are attempting to push to new highs, while the stock market levitates as it has many times before in the face of deteriorating fundamentals. This is all lining up for a monumental Autumn financial crisis, with quite possibly a limited recovery and then a further crisis in the Spring, following the pattern of the 2008 GFC.
With the US government already so heavily in deficit going into such a crisis, and the rest of the economy so heavily in debt, the scale of monetization and government deficits required to forestall financial failure may very well make the 2008 response look tame. The difference this time is that the US$ may not be seen as a safe haven, especially with the rest of the world working so hard to put alternatives in place. Such a scenario would then create the external economic and financial discipline upon the US economy that it has operated without since the early 1970s. The only way out would then be full-blown US debt monetization by the Federal Reserve, a rapidly falling exchange rate and a US inflationary crash. The opposite, of a US “structural adjustment” will never be acceptable to US elites. The US may manage to “muddle through” as it managed to do after the dot com crash and the GFC, but each time the odds of failure become greater. Just as with the climate, linear change may give way to non-linear discontinuous change with little or no warning.
We live in interesting times as the Chinese saying goes, and each year may bring new surprises. The ability of people and groups to normalize new realities after the immediate surprise is extremely high, as shown by the normalization of COVID lockdowns, masking etc. The decline of the Western Empire, and perhaps humanity if climate change is not dealt with quickly, may come in a series of sudden drops, interspersed by periods of relative calm. To the next generations the current arrangements of geopolitics and living standards may appear as real as a Greek tragedy is to us.
In 2016, I wrote a novel about a climate crisis set in 2032 while enjoying the summer sunshine and endless lattes. Sadly, it has been surprisingly prescient with that date of 2032, or perhaps 2036, looking bang on the money. I will serialize it by chapter here for you to read, not just to judge my writing ability but also to provide insight in a hopefully accessible way into one possible path for geopolitical developments in the next decade and a half. It is “fast paced” as the cliché goes, so it will hopefully not bore.
What I often observed in China was a strong sense of togetherness. I knew this "solidarity", or rather a code, already from the time when I reported during the civil war in Yugoslavia. There was always a dregs of concilience ...
"The Chinese real estate bubble is slowly being deflated by a party-state that, thanks to Xi's efforts, has extremely high levels of competence and has greatly reduced corruption."
And that's where the middle class, at least the portion that has amassed large private fortunes in the upper income brackets for the last 20 years, can become a problem. Many claim to be Christians. Many have invested in such "yield objects", e.g. Schengen visas in Portugal, Malta etc for a minimum deposit of 500,000 €, whose children then study in US and/or EU universities. We all know that this is for years a kind of recruitment of a 5th column then such umbrella and color riots organize.... But maybe the West will be broke before it can let them off the leash in China.
"When United States was far and away the predominant world economic power it could afford to maintain Chinese-style tributaries. Thus these very states, alone amongst US military protectorates, were allowed to catapult themselves out of poverty and into first world status.
"After 1971, as US economic strength relative to the rest of the world began to decline, they were gradually transformed back into more old-fashioned sort of tributary. Yet China's getting in on the game introduced an entirely new element.
"There is every reason to believe that, from China's point of view, this the first stage of a very long process of reducing the United States to something like a traditional Chinese client state and, of course, Chinese rulers are not–any more than the rulers of any other empire–motivated primarily by benevolence, there's always a political cost and what that headline marked was the first glimmering stuff what that cost might ultimately be. – David Graeber. Debt, The First Five Thousand Years.