BEIJING – In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures. First, China’s housing market is on the brink of collapse. Second, China’s fiscal position will worsen rapidly because of massive local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country.
In fact, despite its problems, China’s economy remains in good condition – at least so far. Indeed, it is not yet near to hitting the rocks.
Since the twenty-first century began, skyrocketing housing prices in China, except for a short respite during the global financial crisis, have caused serious social discontent. After years of half-hearted effort, China’s government has finally clamped down on housing speculation. As a result, prices fell in October for the first time this year, while real-estate investment growth fell as well.
But the fall in housing prices is unlikely to turn into a rout, because real demand for houses will remain strong after speculative demand is driven from the market. As soon as housing prices fall to an affordable level, buyers will enter the market and set a floor under the decline.