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Ezrati’s Economic Outlook: China’s Growth Prospects

Real estate bubble burst more manageable than in the U.S.

By Milton Ezrati | Updated on April 10, 2012
Of all the fears discussed in the financial community these days, worries over China’s expansion loom large. The government in Beijing has revised down its growth expectations to 7% to 8% a year from the old, breakneck pace of 10% to 12%.

Private groups, such as the American Chamber of Commerce in China, have made similar downward adjustments in their expectations. Meanwhile, concerns about a burst Chinese real estate bubble cast doubt on even the reduced growth expectations, not the least because they call to mind America’s troubles of 2008-2009. Though there is good reason to anticipate a slowdown in the pace of Chinese growth, it would be a mistake to exaggerate the risks, and especially to do so by drawing easy parallels to America’s real estate debacle.

The most immediate reason to look for a growth slowdown is last year’s monetary restraint. In 2011, China tightened policy in response to increasing inflationary pressures. Consumer prices for a while rose at an annual rate of almost 7%, up from 3% in 2010. To forestall the inflationary momentum, the country’s central bank, the People’s Bank of China (PBC), drained liquidity from the system, raising its benchmark lending rate five times for a total of 125 basis points, increasing the reserves required of its banks six times, to 21.5% of deposits, and using guidelines to restrain lending in specific sectors, most notably autos and real estate.

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