China’s Top Problem Isn’t The Trade War

&l;p&g;&l;img class=&q;dam-image bloomberg size-large wp-image-39324655&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; . Photographer: Qilai Shen/Bloomberg

China&a;rsquo;s top long-term problem isn&a;rsquo;t the trade war that dominates the social media recently. It&a;rsquo;s a&a;nbsp;home bubble&a;mdash;the soaring home prices that makes landlords rich, while it shatters&a;nbsp;young people&a;rsquo;s dreams of forming&a;nbsp;a family.

Average prices of new homes in 70 Chinese cities climbed by 9.7% on an annual basis in December of 2018, up from a 9.3% in the previous month, according to

That&a;rsquo;s the 44th straight month of price rises and the strongest annual gain since July 2017.

Soaring home prices put homes beyond the reach&a;nbsp;of&a;nbsp;the country&a;rsquo;s average citizen. And that hurts the country&a;rsquo;s long-term growth prospects, far more than the trade war. In fact, the trade war is just a temporary problem. It will ease, once Washington and Beijing find a formula to appease nationalist sentiment in the two countries.

But the problem of home affordability that constrains young people&a;nbsp;from&a;nbsp;forming a family is here to stay, and could be compounded by other factors. Like the middle-income trap and the Lewis point, as discussed in previous pieces here.

Worse, the soaring home prices in major Chinese cities isn&a;rsquo;t an accident. It&a;rsquo;s the product of deliberate local government land policies that favor rich landlords over the average citizen.

How? By creating scores of &a;ldquo;ghost cities&a;rdquo; — cities filled with buildings with&a;nbsp;vacant&a;nbsp;apartments. &a;ldquo;The mismatch between the cost of new homes and the content of the typical Chinese wallet is complete,&a;rdquo; writes Ruchir Sharma in BREAKOUT NATIONS: The Pursuit of the Next Economic Miracles.&a;ldquo; Developers are building &a;ldquo;ghost cities&a;mdash;&a;ldquo; vast tracts of apartment high&a;mdash;rises and malls that remain largely vacant because the Chinese worker can&a;rsquo;t afford them.&a;rdquo;

Vacant apartments belong to wealthy landlords who expect to sell them one day at higher prices.

Meanwhile, holding apartments off the market fuels a huge housing shortage, which pushes the prices for &a;ldquo;second-hand&a;rdquo; houses ever higher. Shanghai&a;rsquo;s Second-Hand House Price&a;nbsp;&l;a href=&q;; target=&q;_blank&q;&g;Index&l;/a&g;, for example, has soared from under 1000 in 2003 to around 4000 in 2017.

That&a;rsquo;s bad news for young people looking for a home to shelter a family.

And that could explain the plummeting&a;nbsp;of marriage&a;nbsp;&l;a href=&q;; target=&q;_blank&q;&g;rates&l;/a&g;&a;nbsp;by close to 30% in the last five years.

Low marriage rates are bad news for China&a;rsquo;s long-term economic growth&a;nbsp;and&a;nbsp;will cause several problems. One of them is lower birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh&a;mdash;to mention but a few.

Then there&a;rsquo;s the unfavorable &a;ldquo;dependency rates&a;rdquo; &a;mdash; too few working people, who&a;nbsp;will have to support too many retired people.

And there&a;rsquo;s the impact on consumer spending, which could hurt the country&a;rsquo;s bet to shift from an investment driven to a consumption driven economy.

Japan has already faced these problems, and it&a;rsquo;s counting three lost decades, even after it settled its trade disputes with the US. China could count many more.


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