Krugman: Will China’s bubble break?

JFunk via Shutterstock/Salon

AMERICAblog/ Paul Krugman on the current situation in China:

Consider the following picture: Recent growth has relied on a huge construction boom fueled by surging real estate prices, and exhibiting all the classic signs of a bubble. There was rapid growth in credit — with much of that growth taking place not through traditional banking but rather through unregulated “shadow banking” neither subject to government supervision nor backed by government guarantees. Now the bubble is bursting — and there are real reasons to fear financial and economic crisis.

Am I describing Japan at the end of the 1980s? Or am I describing America in 2007? I could be. But right now I’m talking about China, which is emerging as another danger spot in a world economy that really, really doesn’t need this right now.

Krugman notes that consumer demand is weak in China (35% of GDP, about half our level) and getting weaker; the rest being made up in trade. But they, like us have a real estate-driven boom in investment spending. The trick is to know how much, since number coming out of China are generally fudged to look better than they are.

The problem is that even these fudged numbers don't give the Professor a good feeling:

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. ... Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.

Krugman asks how much damage the bursting Chinese bubble will do to the world economy. He considers both sides of the question — China's undemocratic government is freer to act than our own, but everything coming out of China sounds like famous last words. Then concludes: "it’s impossible not to be worried".