BANGKOK, Thailand Put together more than $1
trillion in mismanaged bank credit, a housing market some say
is in worse shape than it was in the U.S. before the sub-prime
crash, rising inflation and a troubled labor market, and
China's near-term future looks grim. But just as the country's
state-driven economy has managed to absorb and overcome a
number of challenges in recent decades, there seems to be a
good chance that it will ride out the latest troubles.
China's overheated, dysfunctional real estate market is the
government's biggest headache and the country's No. 1 topic of
conversation. The problem is simple very few city dwellers,
even among the new middle class, can afford to buy the kind of
house that their rising incomes have led them to expect. The
ratio of housing price to household income in China was about
91 in 2009, and as high as 201 in major cities like Beijing and
Shanghai, according to statistics quoted in state-run media,
compared with a ratio of about 31 in the United States.
Unlike in the United States, however, potential homebuyers
haven't rushed to sign up for mortgages they can't afford-in
fact, many buyers still pay in cash, and household debt levels
are low. That's prevented the kind of housing price collapse
that derailed the U.S. economy.
But cheap credit is creating problems in China, too
state-owned banks have poured more than $1 trillion in loans
into the economy since the 2008 financial collapse as Beijing
pulled out all the stops to prevent a sharp slowdown in growth.
It worked-gross domestic product (GDP) growth was 8.7 percent
last year and 11.9 percent in the first quarter-but too much
hot money has been diverted into the real estate sector,
pricing ordinary Chinese out of the market. In an indication of
the seriousness of the situation, the fundamental problems
facing China's housing market could be worse than in the United
States, a central bank advisor warned.
Any government that can't house its citizens faces the chop,
but change at the ballot box isn't an option in China. Beijing
is rumored to be on the verge of introducing a property tax in
some cities to cool prices and is raising investment in
affordable public housing, but the chances of a hard landing
still look high.
But if China's housing problem is caused by outstripping
wages, rising labor unrest is the product of a very different
dynamic. A rare strike at a foreign-owned plant in China in May
resulted in workers winning a 24-percent wage hike from the
plant's owner, Japan's Honda Motor Co. Ltd. As well as demands
for better pay, workers complained about unsociable working
hours and faulty air conditioning. Those aren't the gripes of
an unprivileged labor force grateful for any job they can
It may seem hard to believe, given China's 1.3-billion
population, but many factories in the industrial heartland of
south China are struggling to find enough young workers as
development in other areas reduces the incentives to relocate
and demographic pressures start to bite. That's driving wages
higher and pushing up inflation.
What all this means for world metal markets is unclear. The
good news for U.S. manufacturing is that China's troubles make
it more likely that it will allow the value of its currency to
rise against the dollar. A stronger yuan would raise consumers'
purchasing power and help reduce inflationary pressures by
taking some of the heat out of the export-oriented
manufacturing sector. The bad news is that this level of
uncertainty-both domestically and in the global economy-makes
the country's ultra-cautious leadership likely to shy away from
any major policy changes in the near future.
A big slowdown in China's property sector could be bad news
for global steel markets if Chinese mills choose to raise
exports rather than cut back production. Construction accounts
for more than half of Chinese steel demand, and while
construction steel products are a far smaller proportion of the
country's exports, that could change. The U.S. trade action
brought against Chinese pre-stressed concrete strand could be a
harbinger of things to come.
The worst-case scenario is a sharp slowdown, leaving a good
chunk of China's 600 million tonnes of steel capacity looking
for a market. That seems unlikely to happen. China's leaders
have proved adept at heading off bubbles in the past and are
clearly willing to let supply outstrip demand when necessary,
with an eye to the hundreds of millions of Chinese who will be
entering the middle class over the next decades. And China's
$2.4 trillion in foreign reserves gives it a pretty handy
buffer against a slowdown.
China has a tough few months ahead and its troubles are
likely to be a drag on both the U.S. economy and metal prices,
just as its expansion underpinned the boom in steel and metal
prices in the last decade. But a crash isn't in the cards.