is china a bubble economy? · growth is actually a bubble and that soon, this bubble will burst,...

Is China a bubble economy?

Jinying Gu

Is China a bubble economy? Since 1978, the Chinese economy has grown very fast, but many are asking how sustainable this growth really is - in many areas, commentators are sugges>ng that at least some of the growth is actually a bubble and that soon, this bubble will burst, meaning that people have not done as well as they thought. To inves>gate this, I divided the whole Chinese economy into five bubbles: The real estate; the stock market; the debt; the “luxury” and the overproduc>on. Among all those five sec>ons, those in the stock market and the real estate market are the most important and dangerous ones in my point of view. The whole research aims to find out the causes, impacts of bubbles and an assessment of how much of China’s new wealth is real or imaginary?

1) THE REAL ESTATE BUBBLE

General situa>on in China: Talking about the housing market in China we have to look back to 1978 when President Deng was the head of government at that >me. He provided the idea that China should have its economy based on the visible hand which means that the government should plan the direc>on of the economy, not rely on the invisible hand. The government planned and restricts the economy . 1

As part of this plan, Shenzhen, Xiamen, Shantou, Zhuhai became the first group of ci>es which have been pointed by the government as the Special economic zones star>ng to trade 2

interna>onally with the other countries with reduced tariffs and other policies to also aVract foreign direct investment. Shenzhen seems to be the most successful one among all. This is not only because of it being in the zones but also as it is near to the Hong Kong giving addi>onal benefit for trading which allowed SZ to develop ahead of other zones. From my point of view, those economic zones in the southern China has moved the concentra>on of people to the south that large groups of people coming from all over the country flood into ci>es like Shanghai and Shenzhen which brought the demand of the housing to an extremely high level that the supply failed to fill the excess demand. This brought the real estate market into the popularity of investors. However, the fast growing of the housing supply doesn’t seem to meet the demand successfully. Firstly, is from the geographic side that in the northern China, there are lots of apartments being only partly built that the resources like land and building materials are wasted. But why the growing in supply does not aVract the excess demand to come and buy? The reason seems to be quite simple that people are finding southern housing more aVrac>ve by having more value that the northern ones are not having the same level of value that because of a lack of consumers, the supplier chooses to stop the supply by pu\ng the half-finished buildings there . 3

To explain it using a diagram, as the housing market become more profitable by the increase in total demand in the housing, the housing agencies in the Northern China has predicted a really high level of demand in housing market that they find it more profitable to supply

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This World: The great Chinese crash? Robert Peston. BBC documentary 2016 3

more under the predicted demand that they actually shiq the supply curve from the original supply to the one with the symbol of miscalculated supply where even the price drop from p1 to p2, the quan>ty been sold has largely increased which helps to boost the revenue. But in reality, the actual demand in Northern China is less than that as more people are focusing in the South, thinking Southern area having more opportunity of development that the actual quan>ty of equilibrium is lower than they predicted and the price is even lower at price3 that the cost of the housing might not be able to cover the profit margin of the housing market is lower which leads to the situa>on shown in some part of the Northern China that half-finished building are wasted there like a ‘ghost city’. (See Graph 1)

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The bubble The further research started by defining the real housing bubble, I prefer the saying of Kindleberger. Kindleberger (1978) stressed that irra>onally op>mis>c expecta>ons frequently emerge among investors in the late stages of major economic booms and lead firm managers to over-invest, over-promise, and over-leverage, which sow the seeds for an eventual collapse aqer they fail to deliver on their promises . To further indicate this, I 4

personally make a diagram. (See Graph 2)

Wei Xiong. Bubbles, Crises, and Heterogeneous Beliefs. hVp://www.princeton.edu/~wxiong/4

papers/review.pdf

� In China, the real estate is playing an important role in the Chinese economy. It is the basic element in the na>onal economic development, providing materials for the economic development which can help the people to improve the living standard of people and improving the inves>ng atmosphere. The real estate market caused the GDP to grow around 2% annually and is a sec>on of the economy which shares the 20% GDP. The housing market is sharing 25% of the foreign investment and another 40% from the foreign investment is shared by the projects pulled by the real estate market. It accelerates the ci>es to develop and the growth of the local economies . 5

However, the con>nuous growth of the market aVracted many investors which are not always good for the economy. As shown in the graph 2 a growing price in the housing market make the market of housing become profitable that people are inves>ng in the market and hoping that someday in the future they can have a higher profit in return. Throughout the country, people who can afford to buy an estate like apartments or housing aqer mee>ng their own living demand, as having spare possession to use they choose to buy more real estates as a kind of investment according to the infla>on in the housing market and the con>nuously growing demand because of the growing popula>on and other factors, which in theory if they wait and sell them in a higher price in the future , they will have a considerable amount of income from their investment in long run. On the other side, lots of people who are s>ll demanding for a place to live or wan>ng to buy proper>es might failed because of it as they cannot afford the price as those investors boos>ng the price to such a high level making their saving less valuable in the market that even their savings are increasing year by year but the housing prices are rising more than propor>onal that their purchasing ability are remain low. (See Graph 3)

—— Na>onal Economy Security 5

Research 2008

6 2008 6 page80

� The actual demand is showing that how many people are seeking for the property that at the original housing supply the housing price is at P1 where the quan>ty is at Q1. However, because of the increasing interest in inves>ng in the real estate market the demand largely shiq from the actual demand to the line of actual and investment formed demand where with the same amount of supply the price boost up from P1 to P2 where most of the people seeking for property could not afford that although the quan>ty increases in selling they are almost bought by those investors instead of those who are s>ll aiming to have their first proper>es. The increase in prices and the increasing demand makes the market more aVrac>ve that more housing agencies are willing to build more houses that the supply shiqs from the original supply to the new supply. As the supply increases, the housing price might have a drop which should higher the purchasing ability of low income group. However, the price might s>ll higher than what they actually should have at P3, although lower than P2 but s>ll higher than P1. When these processes repeated aqer a long >me the price grows to the peak the bubble appears and grows larger and larger to a point where the actual demand decreases largely as they are no longer having the abili>es to buy a house they stand back and seeking to save more that the investors aqer boos>ng the price that high they are not able to sell, the value of their houses are dropping that they are forced to sell at a lower price. As the price of housing is dropping together, the housing market collapsed, that is when the bubble burst. There is another different explana>on of the causes of the bubble. Firstly, the central bank hesitates when trying to control the price as the housing market is such a large propor>on in the na>onal economy growth that it is not easy to both control the price growing slower but at the same >me not to damage the growth of the GDP. Despite this, even the government takes ac>on by trying to blame certain members of the local government none of them has yet been treated like that. The local government in the bubble also acts an important place that they are trying to keep the bubble as the bigger the bubble the more income they will have under the circumstances where the bubble s>ll hasn’t burst. This is because they can have huge amount of income by gaining land-transfer fees and the taxa>on revenue from property developers, house selling agencies and the house buyer themselves. In average, each property with a high price, 60% of the price belongs to the taxa>on. Thirdly, there aren’t many ways of investment in China that people are all crowded into the housing market as they are worried about the infla>on in the future. This leads to the people going into the housing market to trying to hoard the empty houses . 6

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Linking to the reality “The possible contributors include low interest rates and increased bank lending beginning in 2003 under Wen Jiabao which allowed cheap credit for the construc>on and purchase of property while making compe>ng debt investments less appealing. During the bubble, local government relied on land sales for income (accoun>ng for up to 50% of revenue), incen>vizing the con>nued sale and development of land . Limited access to foreign 7

investments for Chinese ci>zens increased the appeal of domes>c investments such as property. Chinese ci>zens also faced cultural pressures encouraging home ownership, par>cularly for men seeking a wife .” 8 9

To explain this further, as the interest rate in China is kept at a low level, it is easier for the firms and people to borrow money from the bank to buy proper>es as it is then cheaper that they are willing to borrow more as they are thinking that they have the abili>es to pay them back. Both firms and the firms are willing to have more investment in the real estate market.

� As the interest rate, has been kept low, people and firms are borrowing money from the banks to buy proper>es that the demand increases from D1 to D2 where the quan>ty been sold increased from Q1 to Q2. At the same >me, even the supply does not increase or increase less than the increase in the demand that the price actually increases. (See Graph 4) What is happening? “The 2005 Chinese property bubble was a real estate bubble in residen>al and/or commercial real estate in China; The phenomenon had seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies and Chinese culture a\tudes7.” What it means by the culture a\tude here is about the tradi>onal Chinese custom that when a couple get married, parents on the husband side should a real estate for the couple and the decora>on fees can be paid by either parent on wife’s or husband’s side, making the real estate become a necessity for ge\ng marry. So why at a high demand situaCon, there are sCll many empty housing on the street? Using what is said by Gillem Tulloch in an interview I have seen in the ar>cle about those empty but sold proper>es: “Owned by people in China's emerging middle class, who now have enough money to invest but few ways to do it. They're not allowed to invest abroad,

Chovanec, Patrick (2009-06-08). "China's Real Estate Riddle". Far East Economic Review. Retrieved 13 March 7

2010.

Bradsher, Keith (2012-06-10). "Selling Abroad, China Eases Slump at Home". New York Times. Retrieved 11 June 8

2012. the popping of China’s real estate bubble over the past year depressed demand for steel, cement and other materials.

AVempts to stop the Chinese bubble". hVp://www.chinesecrash.com”. Retrieved 2011-07-22.9

banks offer paltry returns, and the stock market is a roller coaster. But 16 years ago, the government changed its policy and allowed people to buy their own homes and the flood gates opened .” 10

I am going to use a famous example here, somewhere called Ordos. A huge number of unsold flats, inlet shops, empty office blocks, enormous view. The dream of building a new, nice, popular town is nice but it has been broken. However, people there are s>ll confident about the situa>on that they believe that the market is s>ll able to figure it out . 11

Other possibili>es causing the bubble There are also other possibili>es of causing the housing bubble in China. The possibility of the bubble might come from the policy of demolishing the old housing in the country and give the original residents a certain amount of money or other apartments as return, the amount of return as compensa>on will be based on the number of families. This means that in order to have higher compensa>on, some of the ci>zens actually come out with an idea of fake divorce that a couple divorce before the government give them the final decision of compensa>on le\ng the number of families changes from one to two that they are then able to have more. There is one special type of compensa>on where the agencies or government give the family an apartment from their new built district, therefore once the couple divorced, they think that they might have more benefits from it. This does work un>l the corresponding policy has been provided. Before the scheme, people are able to have more estates than before which make the supply even less in the market driving up the price which might be causing a small accelera>on on the process of bubble market. The other possible reason might come from a special type of proper>es in the market; the proper>es with military-ownership. Simply, this is the kind of proper>es is under the circumstances that there are spare proper>es leq aqer the successfully solving the military members housing problem, meaning the army put the proper>es in the market for sell but not selling the ownership of the proper>es, what they are selling is the residency that the consumers only have the authority to live in and use the estate but does not owned the property. This is a case similar to where the people pay the rental fee of living in one go in my point of view.

What if the bubble burst? The housing boom in China is becoming a disaster, as people are s>ll having irra>onal predic>on of the housing market, persuading themselves that it is not yet a crisis. However, as China is hugely relying on the housing market to develop the economy, once the bubble burst, the price of the housing will drop rapidly that most of the middle or high income groups will make a huge loss as the owned empty property are dropping values day by day that what they are thinking about is no longer the profit but to sell them as soon as possible to avoid further loss on this business. But at the same >me the demand of the proper>es do not increases but even decreases as no one knows what is the boVom line of the price, does it worth buying a house? No. The banking system will also collapse, as if people not paying back the mortgages, even they get their proper>es as return they are having less value than the money they have lent to the people that in total is a big loss to the bank. Banks which are not large enough might even lost the ability to run any more that they shut down. As a result, people are all trying to get their money out of the banks to avoid loss. Factories and businesses might be closed as the rental fees dropped, they are having less value which leading to the increase of unemployment which in the economy cycle harms the growth of the economy. To a further step, the crimes might start to increase as people are lack of

hVp://www.cbsnews.com/news/china-real-estate-bubble-lesley-stahl-60-minutes/ 10

hVp://www.bbc.co.uk/news/magazine-17390729 11

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money to guarantee their daily lives .(See Graph 5) 12

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� To indicate this further, according to graph 6, as the housing market collapse, the investment and the real value of the consumers’ income decrease, this means that they will have more incen>ve to save than spend that the consump>on will decrease as well which will lead to the decrease of the consump>on. As the aggregate demand equals to consump>on plus investment, export, government spending and minus the import as the other factors stays the same, the consump>on and investment decreases the overall aggregate demand decreases that the AD curve shiqs from AD1 to AD2, where the GDP decreases from Y1 to Y2 that the na>onal economy been damaged that at the same >me, it might decrease the infla>on and even causes defla>on which is extremely harmful for the economic cycle.

Impact of the ongoing bubble The other effects that the housing bubble will bring are indirect. This means that the housing market’s bubble will not only influence people in their daily life and the investment paVern, it will also influence other sectors, the export sector, for example. To indicate this further, in 2015, the trade balance was nega>ve that the import is much higher than the figure of export. According to the trade figure in September 2015, the export has decreased by 5.6%,

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the trade balance as a result was 10 billion yuan less than predicted. This is probably caused by the accelera>ng raising of house price where the rental fee of the land simultaneously increased as well leading to higher produc>on costs that the firms pulled up their prices to avoid the decrease in the profit margin. This movement in price has reduce the compe>>veness of Chinese firms in the global market that even China is a well-known export country, the export figure can s>ll be influenced easily by the housing bubble. This has indicated that the housing bubble has become a big difficulty to tackle before Chinese Economy to have a further growth. If the bubble is already this powerful in influencing the economy, what will happen if it burst will be the nightmare of Chinese future development. As a conclusion, there is the exis>ng of the housing bubble within the Chinese Economy and the size of the bubble is already very large with the danger to burst at any >me. With the size of the bubble con>nuing growing, if there are no solu>ons can be provided to avoid the further growth of the bubble and the likely crisis it will bring about, Chinese economic growth will not be sustainable. Solving the housing bubble problem has already become an emergence that need to the country deal with.

2) THE STOCK MARKET BUBBLE

To understand this bubble, it is necessary first to understand the atmosphere of the Chinese stock market in the past decades. At the beginning of the 21st century, the stock market in China is facing a trough where the share price is low caused by the low demand. Aqer around 2010, the stock market start to recover from the 2008 world economic crisis and started to grow at accelera>ng speed as the technology stocks and the building materials companies have their shares became popular that more and more people buy shares from those companies. This movement is benefited from the increasing importance of technology development and the infrastructure development. As more and more people entered the stock market the demand of shares increases, companies started to increase their supply of stocks. However, the market has, to an extent, become a big bubble that could burst at any >me under any condi>ons.

Before looking into the detail, it might be beVer to have a glance through the Chinese stock markets during the last decade. According to the graph 7, which shows the changing of the Chinese stock market from 1997 up to 2014, what could be found out is that the total value of the stock market (Refer the blue line) was nearly set horizontally from 1997 to 2006. During that >me, the stock market was not yet a popular way of investment, especially as China always has the culture of saving most of the income for future use and the future genera>ons, the incen>ves to take the risk of losing and entered the market was really low. Stock market at that >me was too risky that most general people in China would not have a try. The >me when stock market was finally accepted by the general people, I would say, was 2006 where in the graph we can see a sudden dumping of money into the market within two years that nearly every one enters the market at the same >me. But this did not last long as in 2008 the global economic crisis star>ng in America had given a big hit in the Chinese stock market that the total value of the market almost immediately dropped by half. The stock market aqerwards has been through a trough >me and at late 2013 (December) the market had its confidence back that people are star>ng to reinvest in the market.

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Graph 8 below gives a close look at the Chinese stock market aqer 2009 un>l the very end of September 2014, compared with the Japanese stock market using capitaliza>on in trillions of US dollars. Both Chinese market and the Japanese market started to recover in 2009 as we can see that the trend of the capitaliza>on is going upwards ever year. The increase was quite stable in Japan September 2013 while China has its capitaliza>on largely increased that especially from March 2014, the capitaliza>on in the Chinese stock market suddenly had a rapid growth that at the September of 2014 the capitaliza>on in the Chinese market actually met the one in Japan and aqerwards even higher than Japanese one. That was probably where the bubble in the stock market became to grow bigger and bigger.

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However, aqer that in mid-2015 between May and June, the stock market suddenly faced a crisis that the stock price suddenly dropped and the whole bubble in the stock market nearly burst. Most of the individual investors are struggled in the market and there were also people been arrested during that period of saving the market. The 2015 crisis will be further explained in the report later. Knowing the recent situa>on of the Chinese stock market, a further step can be taken to inves>gate what has caused the bubble and what will likely to take place if China failed to control the growing of the bubble.

The causes of the bubble in the Chinese stock market To understand the causes of the bubble we need to understand “What has caused the rapid growth in the market?” as the bubble always take place when the price has a rapid growth. Before inves>ga>ng what causes the rapid growth, first thing we need to work out is how do

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Graph 7

Graph 8

http://blog.sina.com.cn/s/blog_5118d6150102wbyq.html

http://www.ftchinese.com

people decide which stocks to buy? The most common one is to buy the same as others. From different media resources people are able to access to all the informa>on they want that they can easily work out the ones they want to invest by listening to what the experts said in the TV program or other kinds of media resources as usually people will recommend some stocks in the media. To my knowledge, lots of the stock market analysis program will have a sec>on when people (oqen outsiders) from the public can call in and ask ques>ons based on the stocks they want to invest or either the one they currently owned. Usually people who call in for help are not professionally trained, they do not have to know about what is the k line graph, the only thing they need to know is right at the end of the experts’ answer about whether to sell, buy or hold. Although they are people who call in do actually have professional knowledge and can understand what those academic words means. The second way to choose the stocks is ge\ng access to the inside informa>on. People who have friends (or themselves) have a job in CSRC or agencies that have really strong rela>on with the stock market are usually able to get access to the newest informa>on around half a day earlier than the others which give them the benefit to avoid large losses and escape from the crisis before it takes place. In my point of view, the most obvious difference between the “access” and the “non-access” was from the last year’s stock market crisis that it seems that the “accessed” people have higher probability of ge\ng out of the crisis quicker. And those can actually be explained by a simple progress diagram as shown below . 15

(See Graph 9)

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There is a phrase in the graph 9 called the name effect. This is actually a main effect of the stock market bubble from my point of view. I put different name effects into two main groups. The first kind (using [a] aqerwards to represent) is where the names of the stocks shows the type of those companies and aVract investors. The second type (using [b] aqerwards to represent) of name affect is slightly strange where the name itself being aVrac>ve because of the pronuncia>on or other similar reasons like spelling and wri>ng, etc. and this true of name affect will be explained later when talking about what causes the bubbles.

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Now, back to the very beginning, what is causing the price in the stock market boos>ng up and why some>mes the growth in the stock market can actually create a bubble? As I was surrounded by people who invest in the share market, I succeeded in working out one of the main reasons ----the Irra>onal Investment. What is meant by this is that people whom do not have knowledge about the stock market enter the market without learning anything about how to win the game in the unstable investment market like this. There are several types of irra>onal investments. Firstly, buy as others. This is probably the riskiest way to make decisions when entering the market as once the person that they followed makes a wrong decision or mean less good decision, not only that person will have a loss so as the people who follow them. This means that there is the existence of a kind of investors who buy the stocks that everyone buys and sell the shares that many people are selling. This kind of investors are not the niche part in the market, the entry of them immediately boost up the price in the market which can create bubble as they do not have to or do not even have the incen>ves to learn more about the stocks they are buying, but only trying to earn profit by following others. This is the kind of irra>onal investment that will enable the firms to gather money more than they need to develop their companies’ projects. A graph can be drawn to explain what is happening in the market when huge number of investors like that enter the market (See Graph 10)

� Assume that originally in the market where most people nevertheless have a certain level of knowledge about inves>ng in the stock market and is represented by the line D1, when more people regarded the stock market as a shortcut to wealth, they started to follow others’ decisions and invest in the market. The capitaliza>on in the market will certainly increase and at the same >me the original demand curve will shiq from D1 to D2, at which point the ini>al equilibrium point no longer exists and the price (p1) in order to eliminate the excess demand will increase un>l mee>ng the new equilibrium point at p2. . The price in the market suddenly increases will certainly aVract more investors and the price will certainly have a further growth. As more and more people are entering the market, the prices will go higher and higher that it is even higher than the company predicted or mean higher than the amount they actually need and in the long run creates the bubble as people may predict as further growth in the share price where the price actually will not increase as high as they imagined. Also, there is the risk where people pull out their money at the same >me and that’s when the bubble will burst. When it reaches the point where the semi- or professionals find that it is the >me to get rid of the shares in order to keep as much profit as

they could, they will sell their shares. Immediately their followers will do the same ac>on as them that suddenly the supply of the shares in the market been largely increased (as everyone try to sell their shares) shiqing from S1 to S2. Usually what has been predicted is that the excess supply will s>ll been meet at the same price or even a higher price as the predic>on is that the price will have a further growth, but in reality, this might not be the case. People who were to buy the shares saw the sudden increase in supply will irra>onally predict the stocks may have a sudden drop, the incen>ves to invest in that stock, as a result, will eliminate that the demand will shiq largely from D2 to D3 where both the price and the quan>ty of trade get hurt badly. As a result, the stock’s price will largely decrease and the financial line of that project of the company might suddenly burst and the company is in crisis and creates the mul>plier affects. The other situa>on might take place is where the demand is too low that even the price drops most of the investors might not be able to get out of the market as there is no way to trade their shares that they are then struggled in the market. This is also a harmful situa>on to the market as people’s confidence have been largely decreased and the finance gathering for further development of the companies will become more difficult and people who failed to get rid of their shares have their wealth decreased as simultaneously the share price is s>ll dropping. Back to the second part which talks about the name effects. Star>ng with type [a], these kinds of stocks show what the companies do as their business that they directly put their name as something related to what they do. To make an exemplifica>on, the stock called “Xunlei” directly shows that the stocks is gathering finance for the video industry, something related to the media as the stock directly use the name of the company, the company which is known by everyone in the country. Therefore, people would know that the stock like this will be quite stable and have the tendency to have a further growth in the future as the media is becoming increasingly popular in China today. This to an extent is actually accurate as buying the shares in increasingly popular sectors can be regarded as buying insurance stocks that can guarantee a certain amount of profit. The drawbacks of this kind of name affect are mainly created by the firms. Firstly, some of the companies cheat the investors by using the vocabulary or phrases from the popular sector to name their stocks which in reality they are doing something completely different to what has been shown by its name. To make a further explana>on, there was a stock is China has a name related to communica>on and technology but is actually doing drinks which is en>rely irrelevant to what has been shown in its name Just benefi>ng from the name of the stock, 16

that stock nearly reached its raising limit as it was in the >mes of technology and communica>on methods development in China. This is a kind of chea>ng that helping the companies to gather the amount of finance which is much higher than they need and it seems that people can actually decide on what to buy just based on the names which id elimina>ng the real meaning of investment that the professional knowledge seems to be useless and actually lower down the reliability of the markets. As we all know, the real appearance of the stock market is a stage for businesses to gather finance in order to have a further development and aqerwards give the shareholders a certain amount of return based on how much they have invested in. The meaning of the market is now screwed because of the market. As shown in graph 11 below, the demand of a company, for example, ought to be D1, but as it cheats on the investors, the actual demand is actually being represented by curve D2 which boosts up the price of the stocks. As from its name, the stocks will be predicted to have a further growth that more people will be encouraged to buy the shares of those companies and drive the price of shares even higher which is much higher than its real value. Therefore, the bubble in the market has been created in that way and grows bigger as the atmosphere is a lack of control.

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Type [b] is more complex and more ridiculous in my point of view. This type of investment is more like playing a detec>ve games or language games. There are several sorts of type [b] investment. I personally put it as three main groups according to the wri>ng of the name of the stocks (usually related with entertainment), pronuncia>on group (links with entertainment, poli>cs, etc.) and the holiday related group. Firstly, the wri>ng group. An example can be used to explain this type of name affect investment. In 2016, there was a series been shown on the TV which was so popular that people were influenced by it, even in the real life. In this TV series, one of the main female characters, in the series, bought a company called Hong Xing and this had nothing related to the real world. Nevertheless, in reality, there was this ‘lucky’ firm doing chemical industry which had already made a loss had its stock also called Hong Xing Development had its share price con>nuously boos>ng up aqer the series been shown16. A successful businesswoman has bought a company in a TV series had become a reason for people to invest in the company instead of judging the real value of invest in the company. Therefore, it seems correct to an extent that in China if people want to make a profit in the stock market, not only they will need to learn professional knowledge, but also, they need to watch the TV series. Maybe firms need to have a good name for its stocks as well. The result of that is that this kind of investment has brought unpredictable growth in the market share price and is usually a short term one that in a short run the demand of par>cular stocks will suddenly goes up and the price is boost up as well. This has created bubble in the market as the companies which do not expected to gather that amount of value has succeeded meaning the companies which worth having more investments may not be able to gain enough finance which is causing the inequality in the market. The problem is that people who buy in the shares of those companies, once they calm down, they will try to sell the shares which is highly unlikely to success as no one would want to buy shares in a company who cannot help itself out of the loss. Secondly, the pronuncia>on of the names. From the poli>cs side, there was a case around the 2008 USA presiden>al elec>on16. Aucma and Obama have similar pronuncia>on in Chinese that there was a buVerfly effect when Obama won the presiden>al elec>ons there were bulk buying in the stocks of Acme leading to its price growth. This kind of name affect can also have links with the entertainment circle that few years ago; there was a pair of couple that both of them were performers. The husband has been found chea>ng in his marriage. To “support” the wife, someone on the internet put out a slogan encouraging people to buy a milk company’s shares simply as the company called ‘Yili’ has the same pronuncia>on as the wife’s first name. This had also caused the stock price of that company boos>ng up which helped the company to recover from the poison milk crisis that took place few years ago, this is a short run might be a good thing as helping some of the firms to

recover. But this kind of growth is giving the company a sudden growth higher than predic>on that it is only temporarily. Once that period has past, the company’s share price might directly drop back to where they were. Those fake growing add up together can create different small bubbles in the market and in a long run causing large bubble. Even if the name does not show what it means, people might s>ll buy in the stocks for no reasons. This kind of investment might also cause the bubble to take place. For example, my mom recently bought in a company’s stock which has its name as 2345, but she has no clue what it is about. Those are mainly the factors that are causing the bubble in the stock market and they need to be removed as soon as they could or otherwise once the bubble burst the country will face a big financial crisis.

What will cause the bubble burst and what are the likely influence been brought by the burst of bubble? Let’s start with a chart (See Graph 12).

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This is the graph represen>ng the financing balance in the Chinese stock market with the blue area represen>ng the balance volume and the yellow line is represen>ng the rate of changing of the financing balance in the stock market in the last two quarters in 2015. I raise this diagram as it is represen>ng the common causes for the burs>ng of the bubble to take place. Star>ng from the June 2015, the stock market in China faced a sudden drop in the share price that over one night, people found their money trapped in the market that it was nearly impossible for them to pull their money out from the market. Some data has been released online which can present the damage that caused by the crisis. The actual date of the burs>ng took place was 12 June 2015, one third of the total value of A-shares in the Shanghai Stock Exchange evaporated within one month. There were two major aqershocks appeared and the date they took place have been regarded as the “Black Monday”. The first aqershock was in end of July around 27th of July, the other one took place in August around the 24th. .According to the Wikipedia figure: “By 8–9 July 2015, the 18 19 20

Shanghai Stock market had fallen 30 percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an aVempt to prevent further losses. Values of

hVp://bashusong.baijia.baidu.com/ar>cle/388469 17

Charles Riley; Sophia Yan (13 July 2015). "China's stock market crash ... in 2 minutes". CNNMoney. Hong Kong. 18

Archived from the original on 13 July 2015. Retrieved 13 July 2015.

Duggan, Jennifer (8 July 2015). "Chinese stock markets con>nue to nosedive as regulator warns of panic". The 19

Guardian. Shanghai. Archived from the original on 9 July 2015. Retrieved 14 July 2015.

"China bans major shareholders from selling their stakes for next six months". The Guardian. Reuters. 8 July 20

2015. Archived from the original on 11 July 2015. Retrieved 13 July 2015.

Graph 12

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Chinese stock market con>nued to drop despite efforts by the government to reduce the fall. Aqer three stable week, the Shanghai index fell again on 24 August by 8.48 percent, marking the largest fall since 2007.” There were several analyses on the causing of the crisis. Firstly, the PB was so high that it was nearly the same as it was in 2007 . This means that 21

under the atmosphere where all the people invest in the market, the market was over heated that the price raised up to the extent where it was far much higher than it was expected to be. The usual result aqer that was the price will drop down as the momentum of growth is small with limited rising space and the market bubble was too large. I think that a physics theory can be used here as a model where we assume the stock market as a balloon, the size of the balloon as the expecta>on of higher price (higher return), the air as the real value of the market and the gas been put in the balloon as the amount of investment by the people. At the beginning, when the gas in the balloon increases, the size of the balloon will increase and we can see that a beau>fully shaped balloon been created. This is when people earn profit from the market and the firms star>ng to gather the money they demand in the market in order to make a further develop. When the size of the balloon grows bigger and bigger, people star>ng to worry if the balloon is going to burst, some people pull out the money, although many of them s>ll expect the balloon can take more gas. The size of the balloon now is even larger, some people stop pu\ng more gas in the balloon, they simply want the balloon to be just like that for a while to see if it is able to take more gas. Those people might be par>ally ra>onal. However, not all the investors are ra>onal---------they want more, way more than it is now. The market finally reaches the point where the pressure inside is the same as outside. Although the pressure can s>ll be able to increase to the extent where it is liVle higher than outside, the market does not let them down, the size s>ll grows bigger. Some people now relax, they sit down and take a tea, the market is brilliant, it can take on more. But what they do not know about is that the real breaking point is achieved. Through a liVle touch on the screen, more gas has been put in the market. The balloon finally reaches the extreme that without no>cing, it burst ------------ “boom”! People can no longer sit on their chairs, they want their money back. However, they realise, the gas disappeared with the air together. People found that they cannot breathe, they were panic, they feared. They need their money back; they try to catch some air back. But most of them failed. The market collapsed. The share price in the market suddenly dropped. I failed to find the immediate value lost right aqer the crisis. But I succeeded in finding a figure two months aqer the first crisis . In two days (27/07/2015 - 28/07/2015), in average, people lost 54 22

thousand yuan each, which was around 4978.749 billion yuan in total (figure in A-shares). Even two months aqer the first crisis the loss of value in the market was s>ll that large, regardless of the amount been lost right aqer the crisis firstly appeared. I have a deep feeling with this >mes crisis. I was in the UK when the crisis took place in May. The social media app called Wechat in China has a similar usage to the Facebook that people can post things on it for their friends to read. Almost immediately my screen was filled with informa>on and analysis about the stock market, about what has been said by the government, about what is the likelihood of pulling the money out of the market without losing too much. Even though I was in the UK, over 12 hours’ flight away from China, I can s>ll feel the breathless atmosphere in China. When I was back in China by the July in 2015 I saw a big change on people around me. My parents focused on their phone screen all the >me, my mom complain about her loss in the market. I would have thought my parents as the irra>onal investors as my mom only invest in the funds and my father did not know many about the stock market as well. They entered the market and bought the shares according to my aunt’s recommenda>on as she had a friend working in the CSRC which gave her the benefit knowing the informa>on earlier than others. However, the level of access to the informa>on

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will fail to work when the crisis suddenly entered as people will never know what others are doing. The second reason caused the crisis was what is called “Chang Wai Pei Zi” (below will be men>oned as CWPZ) in China where people use high leverage to invest in the stock market . 23

Using a simple way to explain this, this is actually a 5-step model to explain as shown in graph 13 . 24

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However, in 2015, the government ordered that this kind of trading is illegal, the ports for those companies to control people’s share accounts no longer exists. The financing companies are now afraid to lend people the money as they no longer have the authority to control the selling of the shares of people. They choose not to lend money to people any more. This suddenly decreased the value in the market as people can no longer using leverage to invest, they pull their money out. The market as a result of that faced the drop in share price. But this in the long run can be beneficial as it prevents people who do not have enough ability to afford the risk entering the market. As I think, only people who prepared and are able to take the risk, desire the likely earnings. Back to the point, this sudden ban did in a short run causing the value in the market flowing out quickly that the value is even less than people predicted, much less, the bubble than been smaller in size. It is similar to the thermal expansion and contrac>on theory (See Graph 14). The original value in the market, as shown in the graph 14, is in a shape which is not too big that the bubble in the market is reasonably small and the real value in the market takes the most propor>on in the market. When the funding firms have been created, people crowd in to the market will shares and mostly are actually high leverage. As a result, the size of the market been boost up (shown as the middle balloon). This is where the heat in the market has been brought in, just like the thermal expansion; the size of the balloon grows. When we arrived at the >me of June 2015, the government has regulated the market and has made those funding firms as the illegal existence; the market faced a sudden cool down. The size of the balloon is contracted. The size of it is now even smaller than the original one, resul>ng from not only the decrease in the investment in the market but also the evapora>on of money in the market and that is the >me when the price in the market sudden drops and the crisis were to begin.

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http://finance.sina.cn/zl/2015-07-13/zl-ifxewnia9183121.d.html?from=wap

https://zhidao.baidu.com/question/1797948151371767627.html

� Looking into more details, what can be found is that the situa>on under CWPZ is rife with danger that the bubble is always ready to burst. Maybe looking into more details about the process of the burst causing by CWPZ can help to give as a further understanding why the CSRC suddenly ban this kind of trading with such a strict rule that even brought us an unexpected crisis in the market (See Graph 15).

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As seen in the graph 15, the chart is demonstra>ng the period from before to right aqer the crisis. In the first period star>ng around 22/11/2014 when the central bank driven up the interest rate, the financial stocks in the first place start to increase the share price. The first block ended on 19/01/2015 when the CSRC toughened the rules of the ‘Umbrella trust’ ( the

umbrella trust in China is known as [ San Xing Xin Tuo],this is another way of providing high leverage . This is the way in which financing companies, security companies 26

and banks using their own advantages, by helping the investors using the bank financing products by stealing the path of trust products, through the ways of equity financing, with capital, etc. to up raise the leverage before entering the stock market . Although it s>ll 27

exists, it is now having rela>vely small influence in the market due to the stricter rules, this is nearly out of the considera>on) which has lower the upward pressure on the share price. Since then >ll 15/06/2015 was the second period where many worth inves>ng points such as OBOR, AIIB, etc. have been created in the market. Gathering with other factors together, the

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billion-problem/

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Graph 15


http://www.csai.cn/gupiao/775697.html

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market was like a piece of steak which has been well cooked that aVracts bulk investment from all over the place. Bull markets situa>on happened >me aqer >me, it seems that the market s>ll has a great amount of space for the further growth. But this kind of capacity is unstable. As being explained above, how many investors in the market are actually ra>onal? As we all know, if the propor>on of irra>onal investors is too large, then the market will hide its real capacity as the wish of further growth has grown. Just like when many people have the same dream, the dream will turn into a faith. As so many people believe in the market, believing that the market will grow to a further stage, believing that they will have their money back, they dumped money into the market, making the demand high in the market, allowing the market to cover up its real limita>on. This is when the bubble within the market been created. However, the dream, the faith finally disappeared, by the >me when the CSRC ruled that CWPZ will be strictly controlled. A frightened drop in the share price has occurred as seen in graph 15. People are worrying about their capital availability, as their profit might no longer able to help them pay back the high leverage, as I suppose most of the people using high leverage to buy shares are using the steps been shown in graph 16.

�In this way, the stock market faced an immediate drop in the share prices and ended up with lots of people stuck in the market. The economy suddenly becomes unstable. However, this might just be the thing that has to be down which is to burst the bubble before it grows even bigger. Therefore, in the short run the market will be rife with uncertainty due to the policy. But it does goods for the future growth. The public concluded another cause of the bubble in the stock market price to drop is the existence of shor>ng stocks where people or investors borrow shares from the shareholders with a small amount of money and then sell those stocks. They promise to buy the stocks back and give them back to the original shareholders together with any dividends that the shareholders should have. Why is shor>ng stocks profitable? Why people are shor>ng stocks? To understand the answers of the ques>ons, it might be sensible to firstly know about the idea of shor>ng stocks which can be explained by the graph 17 below.

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Graph 17 is indica>ng the process of shor>ng stocks. The whole process starts from A where the short sellers focus on several stocks that are having the tendency to growth. They will wait for those stocks to have a further growth. If there are stocks suddenly decrease in price sharply, they are out of the lists of the short sellers. When it reaches the second period (where B and D are), the short sellers tend to give up the stock in area D and focused on B as the stocks in area as B are more profitable based on higher share prices. At this stage, the investors will go to the current owners of the shares and nego>ate with them saying that they will pay them a certain amount of money in order to borrow the shares together with the promises to buy them back in the future. They will then sell those shares and buy the same amount back when the price is lower and pay those shares back to the original owners. And this is shown by those blue arrows in graph 17. The theory is that when they suddenly sell lots of shares in the market, the supply of that stock within the market, there will be downward pressure on the share price in order to eliminate the excess supply within the market. Therefore, a formula can be concluded, which is price for sell - price for buy = the gross profit for the trade, the gross profit for the trade - the fees for borrowing = net profit (the real amount of money earned by the short sellers). Once the shares have been brought back and given back to the original owners, the share price should theore>cally increase again as the demand with in the market boost. We might say that this method is sensible as the shares can be bought back and the firms can earn a certain amount of money on lending and certain amount of dividend if they have it discussed when lending the shares. Simultaneously, the short sellers can earn amount of money from the stock market. However, this kind of trade has a limit that once the amount of shor>ng stocks is above the limit, the market will be rife with the danger of collapse as the market has not yet have the ability to cope with that high amount of expecta>on. This is also being regarded as the biggest reason for the share market crisis took place in 2015, as a result of which the CSRC together with the police in China decided to check some of the companies which have the suspicion of shor>ng bonds and stocks within the market in order to stop the further fall in the share prices. This is also aVemp>ng to raise the confidence in the market so that people might be able to calm down and think about their decisions that are about be make more carefully. Especially, when they have the signal that this >mes crisis is mostly caused by those companies shor>ng stocks and bonds that once the government intervened in those cases, the share price should be able to stable around current level and regrow in the future soon or later if the government were to dump money in the market to pull the price from falling

further. The influence and the damage that has been brought by the 2015 stock crisis are obvious. Several ac>ons were taken immediately when the impact of the crisis became large. According to CNN, the government was buying stock that beyond the $20 billion purchase promise made by the brokerages, there were also 21 brokerage firms being able to took out a loan from the CSF with total value around $42 billion to buy the stocks so called: “blue chip” stocks. Secondly, China is s>ll encouraging people to buy the stocks of the small or middle firms which in my point of view, is a sensible way to tackle the stock market crisis. As buying stocks from the smaller companies can help and encourage their investment to develop their companies which help to decrease the impact brought by the crisis and also having actual growth in the stock market as those smaller firms have the abili>es to be much beVer than they are at current stage, the only thing they need is probably the money which means that if the investors can provide them with money by buying their stocks, they will then be able to expand their market and the size of the business. Simultaneously the aVen>on focused on the big firms can be released, meaning that they will be fewer incen>ve to invest in the big firms that the share prices of the big firms will not be able to raise too high above their actual value, which in the long run can prevent the bubbles regrow in the stock market. Recently, there is “another” stock market became popular in China. This is the stock market been created for the small firms who need the funding but failed to achieve the stock market threshold. This market is similar to the formal stock market but smaller in size and only available for small enterprises. As more and more people are now pu\ng their aVen>on in this separate stock market, the upward pressure of price in the formal market is released that there is less chance for the large firms’ stocks to have their share prices increase deliberately by back stage control. Therefore, the likelihood of the bubble in the stock market to regrow will be smaller.

3)LUXURY GOODS BUBBLE From one of the website called the bubble, I have found an ar>cle wriVen by an author called Jesse Colombo. He has concluded a different type of bubble that occurred in the Chinese economy; the “Luxury bubble”. This is the first >me for me to see someone conclude a par>cular consump>on paVern as a bubble.

What is the luxury bubble? From the name, we can know that this is actually quite simple. As the economy in China is con>nuing to grow beVer, a school of thought becomes popular in China which is the more expensive the good is, the beVer the quality of the products will be. This means that instead of finding the products which are cheap and with high quality simultaneously, people tend to choose high reputa>on products with much higher prices as if the products with higher price has a beVer guarantee on their quality. This can create the bubble in the economy as producers set their prices much higher than the real value of the products knowing the fact the consumers will take all the prices they have set. This means that the massive infla>on on luxury goods will be the only outcome of that. This can be concluded as a bubble as people who bought those luxuries are not only considering them as a way of showing their wealth, but also a type of investment that those luxuries can also be counted as part of people’s wealth. Therefore, the overall expecta>ons on the growth in value of the luxuries are actually higher than those luxuries really worth to have. As a result of that, the opportunity costs of buying the luxuries become is huge. The government has tried to put regula>on on the luxuries that it has put a huge tariff on foreign brands luxuries. However, I would consider this as a government failure as the government did not realise that the luxuries are PED inelas>c that the result came out of that is preVy much on the contrary of what the government has expected to see that even the price of foreign luxuries increase, people are s>ll consuming those products and even created great amount of abroad consump>on

where people buy lots of luxuries from abroad directly to avoid the higher price in China brought by the tariff. Although the regula>ons do prevent consumers with lower income, this has caused a huge amount of money ou�low which can undermine the development of China which can be explained by Graph 18.

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This has caused a situa>on where the firms are able to gain the revenue which is at least five >mes higher than the cost of outsourcing in China. They have created the situa>on where the GDP failed to indicate the real growth of the economy as most of the GDP will flow outside leading to a worse trade balance. Using the figures from the shanghaiist website, Chinese people have almost bought up half of the luxury goods in the world with total value es>mated around $183 billion . This figure is frightening, indica>ng that we have spent way 28

more money on the luxury goods than we expected which can be an opportunity cost that with that amount of money, people would be able to help and develop the country further. However, what cannot be ignored is that people have the right to use their money on whatever they want. In this way, the only way the government can eliminate this kind of bubble is to help the domes>c firms to raise their compe>>veness in the world market which at least can eliminate some of the trade deficit. The consump>on of foreign luxuries has created mul>plier effect on the economy that the domes>c firms will lose their compe>>veness as with less reputa>on they will not be able to compete with foreign firms like Prada. This has created a long-term drawback that except for being a haven for foreign firms to set their outsourcing or overseas factories, China itself does not have many brands that are strong enough to compete with other firms in the world market which indicates that the likelihood for Chinese Economy to have an outstanding growth aqer passing the Lewis turning point is small and that the reserve strength of the economy can be rela>vely weak.

4 DEBT BUBBLE The other bubble which is now becoming more serious is the debt bubble within the Chinese Economy that among all the websites and resources I have read through, nearly all of them have es>mated the amount of debt in China last year range from 240% to 250% GDP. This issue has become more serious at the beginning of the second quarter in 2016, where many well-known news websites in China gave the headline to the debt. The situa>on of debt in China is different from those in America and in Japan. America is famous for its giant na>onal debt since the beginning of the 21st century. However, the worries that it brought about is rela>vely small as the American Economy is strong enough to afford those debts and with the strong economy they are less likely to have a debt crisis, even they do, they will be able to overcome it. In Japan, even though its economy isn’t doing quite well recent years, the debt bubble in their economy is with high liquidity which gives them less concerned on the debt situa>on. Also, as most of the debts of Japan are hold by Japanese themselves, there is not absolute debt crisis in Japan . While the situa>on is, China is different, the Chinese 29

economy at current stage is not yet strong enough to hold that amount of debt that once the bubble grows bigger, the whole economy might enter a period of debt crisis which might

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damage the development of economy in China. Especially aqer the 2008 global economic crisis, Chinese development is relying on the credit which means that the investment and part of the economic growth is built on a high level of borrowing . 30

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According to the trading economics website, the Chinese government debt to GDP is on a trend of accelera>ng increasing which is shown in graph 19 where the na>onal debt >ll the year 2015 has already raised to a high of 43.9% of the GDP. Although this sharp increase might be caused by the government dumping money into the stock market to save the stock market when the crisis took place in 2015. This has indicated that if the government borrowing is increasing con>nuously, once the level of it raise to more than 50% of the GDP, there might be a debt crisis that as China usually spend around 50% of the GDP on investments, once the level of government borrowing is higher than 50%, the debt crisis is likely to occur as the total spending is higher than the GDP, regardless the GNI which is even lower than the GDP indica>ng that China already has more money flown out than coming in. However, the debt problem might already become quite serious as the total financial credit according to CNBC it has already raise from 147% (2008) to 251% (2016) (public and private sectors combined), a giant increase . Looking at the news wriVen in Jun 2016, Chinese total 32

debt was around $28 trillion, which was already higher than the ones in Germany and America, sugges>ng that the debt was higher than we expected. Unless we start to take ac>on, the expectancy of the level of debt will always be lower than the actual level which can also create bubble in the economy.

Moving on to next part, I decided to looked at the economy as a whole and judging on the real growth of Chinese economy.

5) THE REAL GROWTH Despite the stock market and the share market, the growth of the real economy in China is also surprisingly quick. However, some schools of thoughts have argued about whether the growth is real. Before pu\ng the real economy in the project, I talked with several people about their views on the economic growth in China. One of the views encouraged me to do the sec>on of the real economic growth: “The measurement methods in China might not be completely the same as the other countries.” The view does make me stop and think that if those figures on the screen actually represent the real situa>on in the economy? I decided to find out the “merit” of growth in China. As known, to a certain propor>on, the GDP is consisted with bubbles which will not last long. According to the China Economic Growth Report 2015 published by the Peking University , 33

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China Economic Growth Report 2015. Macro Control and Economic Structure Upgrade Under 33

the New Normal

http://www.cnbc.com/2014/07/21/chinas-debt-to-gdp-ratio-breaks-250-of-gdp.html


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in general, over the last thirty years, the annual GDP growth rate was close to 10%. The total GDP comparing with the one back to 1978 is 24 >mes higher. The GDP/capita is having an average rate of growing at around 9%, 17 >mes higher than the beginning of the economic revolu>on provided by President Deng Xiaoping. The average income of people has also had a significant rise as China has grown from a low-income country to the one with high-middle income.

� However, with those bubbles been men>oned above, figures on the paper seems to loss their real value that they are not actually indica>ng the real situa>on in China. As shown above that there are the exis>ng of housing, stock market, luxury and debt bubble exis>ng in the economy, the GDP fails to work as an indicator of the real growth in China as it is extremely difficult to es>mate the fake value that has been created by those bubbles, but what can be worked out is the influence that those bubbles have in the economy which is shown in the report above. On the side of the housing market, the existence of the ghost town has indicated that not all the resources are used in the correct way. The money been put in to produce those ghost towns are counted in the GDP figure as those investments no maVer useful or not are counted as expenditure which give the figure the right to be part of the GDP figure, showing that within the real growth figure, there is the bubble from the housing market. In the stock market, when people are pushing up the share price by dumping lots of money in the market, they are having a higher expecta>on on the share price than the real value which gives them the illusion that they are “wealthier” which can create the incen>ve for consump>on and investment as people think that their extra consump>on can be eliminated by their earnings in the stock market and the firms on the other hand have the school of thought that their investment fee can be covered by the profit from the stock market. Thus, a fake increase in the GDP can be created. However, once the dream burst, the bubble burst, the share price has a sudden decrease, both investment and consump>on will be largely influence by the change, thus the AD will shiq to the leq with the sudden drop in purchase incen>ve. Therefore, the real income as a result will drop that even the GDP figure stays posi>ve; it would be as high when the bubble does not burst. Therefore, in the GDP figure, there is the shadow of the stock market bubble and create uncertainty in the GDP growth. Despite that, the other obvious point demonstra>ng the invalid GDP figure is the overproduc>on brought by the Chinese economy development as it approaches nearer to the Lewis turning point. Around the changing in different produc>on sectors, I have made a pie chart (See Graph21).

Graph 20

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In 1978, among the employed workforce, people in the agriculture sector were high at 70.5% which is shown in the blue segment. While other sectors including manufacturing took no more than 29.5%. However, with the government itself aiming to industrialize the country, the rate has changed so that the agricultural employment in today’s term takes a much less important role in the Chinese Economy today. In fact, being on the Lewis turning point, China is trying the type of economy from agriculture to industrializa>on. However, there is the problem of over produc>on in it that the welfare loss and the opportunity costs are enormous and is largely known as the over produc>on. The typical example of this is the steel and iron produc>on in China. The main problem is not on the produc>on itself, it is on the amount of steel and iron been made that China is currently crea>ng more steel than the total wants in the world, causing excess supply, as a result, China is dumping the excess supply into other markets. This is not benefi>ng the economic development in China as the steel price is actually quite flexible due to the fact that most of the steel and iron industries are actually state-owned . This means that with the government subsidies even the firms 34

are losing money due to the extreme low prices, the firms will never shut down as the government would not like the unemployment figure to have a sudden increase which as a result most of the state-owned steel industries become “zombie” firms that the government pay them money just to keep the firms busy and keep the unemployment rate at current stage. As a result, the opportunity has been created that the labour can be spent on the other sector like high quality goods produc>on line which has a beVer poten>al ability to develop and instead of producing steel and iron; China can turn to create more valuable materials like silver or high value-added consumer goods. This means that the steel and iron being produced are actually wasted which is damaging the ability of sustainable development and simultaneously with large amount of industrial gas emission, the environment around is damaged which can be already seen in the capital city Beijing. Therefore, it is indica>ng that the GDP growth rate does not actually represent Chinese economy fully as it not only includes the real growth, but also the fake growth made by the bubbles like over produc>on as GDP can only measure the output. With all those points above; a clear conclusion can be drawn out that there is the exis>ng of bubbles within the real economy that has given people a wrong expecta>on on the economy growth which can creates more bubble within the economy if the irra>onal expecta>on

1978

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Graph 21

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cannot be prevented.

6)SOLUTIONS AND THE LIKELY FUTURE TREND IN BUBBLES Housing bubble On the side of the Housing market, according to most of the reports and news that I have read so long, most of them are claiming that the government will plan and provide policies stopping the house prices to raise any further and to an extension, the government might try to burst the bubble deliberately instead of bearing it to growth any larger. The problem of the housing bubble as far as the government is concerning is that the housing bubble is killing the future development of China. Chinese GDP/capita only 1/8 comparing to countries like America, whilst house price in some ci>es is even higher than the same type of ci>es in America or Japan that according to some of the media, the profit been earned by one property is even higher than fiqy percentage of the quoted companies and some of the small enterprises as result of high property rental are forced to shut down which is damaging the poten>al growth of Chinese economy. According to Lei Sihai , damping the housing bubble will be painful in that in the short run 35

the price of proper>es will drop hugely damaging the whole market and the confidence of people. However, this is the step that the Chinese economy will have to take in order the smaller the likelihood to get hurt in the future when facing bigger crisis simultaneously, like the global economic crisis. He stated that the Chinese central bank has already held a mee>ng with the five state-own banks and 12 banks (using shareholding system), claiming that the restructure of the credit need to be strengthen and the control of the credit in the market must be stronger. This has indicated that with the government taking more concern on the credit control, it might be possible for us to say that it will discourage the purchase of the proper>es. As under the government’s improvement in the control policy, people will find it more difficult to get a mortgage out of the banks as the background checks and all the other policies been >ghtened, meaning taking out a mortgage will become more >me consuming. As a result, in the short term, the incen>ve to take out a mortgage form the bank will be lower that according to the supply and demand curve, the equilibrium point will be stated at a lower price level which helps to put downward pressure on the property prices. This policy might help to filter out some of the people who are actually buying proper>es as investment instead of living requirement, thus, giving the market will have more actual demand that more people who really need to have a place to live will have more possibility to gain a house at a lower price. Although this policy has also wiped out some of the people who are seeking for a house to live in as the process of taking a loan outside the banks has become >me consuming that with the uncertainty of tendency of housing prices, they tend to pull out of the market and wait for longer. Also, misunderstanding might be created that people who cannot really understand the policy will be wiped out of the market as well. Nevertheless, the cool down in the house price will likely lead to the situa>on where people’s expecta>on on the house price will be lower towards the actual value of the proper>es, which will likely to decrease the size of the bubble as I have men>oned right at the beginning of the report that the star>ng point of bubble is always being the overes>mate on the value of the market or products. Once the price of proper>es is star>ng to drop, housing investors who owns many housing will probably try to sell their available proper>es as soon as possible as the profit margin of the proper>es are dripping that if they do not sell faster than other sellers, they will become the one who pay more to buy the housing than selling them. Not only restric>ng the control in the mortgage system, the government is also stricter in their control and checking of the online P2P net loans, focusing on over adver>sing on the media, promises of high returns, etc. This has restricted the illegal loans and other loans which are not well planned and help to eliminate the informa>on asymmetry gap between



the P2P firms, investors and loan takers regarding their increasing in trade with great accelera>on. This is aVemp>ng to lower the interest of people taking out cheap mortgage and enter the housing market and drive the housing prices to an even higher level. The third method been used simultaneously is published by the CSRC ---- renovate the 36

funding firms, property agencies and other housing firms by preven>ng them using the name of equity-based crowdfunding but actually doing illegal with funding. With less illegal with funding in the market, it is more difficult to raise funds that the situa>on where the funding firms drive up the share price by bulk buying is unlikely to happen. With the stricter policy on fund raising, it is less easy for the property firms to gather their fiancé to build a new property district that when the supply of the housing becomes more difficult, the likelihood of the ghost town to appear again will be preVy low. All those policies above should help to prevent or at least slow down the increase in size of the bubble, if they are strictly followed. However, the government and related ins>tu>ons’ regula>on cannot solve the bubble completely that the use of the polices will only help in the short run that in the long run their power will disappear. Therefore, long term plans to prevent the bubble from happening need to be taken. I personally suggest the government and related ins>tu>ons to provide educa>on through media which can help to give people a beVer understanding of the housing market. This can also help to reduce the level of irra>onal investment in the housing market that people will have less expecta>on on earning profits in the housing market. For example, TV program can invite some professionals and tell people about the current situa>on in the market that if the people are more ra>onal in inves>ng in the housing market, there will be less over expecta>on in the housing market which can help to prevent the bubble. Therefore, the bubble in the housing market in the long run should reduce its size if all the policies are well conducted and people can have a beVer level of knowledge in the housing market to avoid irra>onal investment. Although in the short run those policies can create extremely unstable housing market which might even burst the bubble before its size is maximised. However, as saying above, even the bubble were to burst now, deliberately done by the government, it is beVer than wai>ng the bubble to burst itself as the impact will be much larger. In the stock market, the government and related ins>tu>ons like the CSRC have also take ac>ons to prevent the bubble regrowth within the market. Since the last crisis in 2015, the bubble within the stock market is much smaller as it has been largely released during the crisis with the evapora>on of the huge amount of capital. However, the stock market is different from the housing market that the size of the bubble is much larger than the housing bubble in the first place as even the housing bubble is large, with the large amount of popula>on; the housing bubble is not as serious as the stock market bubble. Therefore, even the bubble at current stage has been largely released, the likelihood for the bubble to regrow is not small, especially when no long aqer the crisis there were two large firms (WanKe and BaoNeng) in China create a share war in the market both trying to become the biggest shareholder of WanKe. This might sound tricky that why a firm intervene in the internal share war of the other firms? The reason in my point of view might be simple , WanKe is a 37

property firm and BaoNeng as a financing and funding company if it is able to control the WanKe then the future growth of both companies will be enormous. However, both of the companies are inves>ng in the stock market with high leverage that even in the short run people who originally owned the share of WanKe can earn quite a lot of money that might be large enough to cover their loss in the crisis, in the long run, once the market has another crisis or becomes unstable, if both of the companies cannot hold themselves stable, the center bank of China might in the end being forced to bill out for them. I am from the very start do not agree firms or individuals to invest in the stock market with high leverage as the


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risk is so high. This war took place in December 2015, the crisis took place only in late May, I agree that this >mes war do create some confidence in the market that people will reinvest in the stock market again as suddenly there was a huge amount of money being dumped in the market can or to an extend drive up the share prices. However, in the long run, I consider it as a crisis; it is a blas>ng fuse for the next bubble in the stock market. People has not yet learned their lesson from the last >mes crisis before they quickly enter the next round of investment with the dream of taking their loss back by earning the profit from the share war. What might not be realised is that this is a share war, the share price is not set by the market itself, it is a man made one that once the result came out, this increase in the share price will be suddenly cut indica>ng it is not a sustainable increase. If people cannot learn the lesson from last >mes crisis, with the share war as a star>ng point another round of irra>onal investment will take place as even some of the people choose to wait loaner before entering the market, the share price will be driven up by the share war giving them the fake informa>on that the value of the market has grown back. Simultaneously what the government can do to prevent the regrowth of the bubble is limited that besides making the rules of entrance stricter and ban illegal funding or restrict individual high leverage investment there is nothing else that the government can provide to stop the regrowth of the bubble. Therefore, it might be a good way for the government to raise the awareness of people in the stock market by providing beVer educa>on. This can be done by open more TV programs on investment teaching people how to invest in the stock market more sensible and lower down the level of irra>onal investment. What I meant by this is that the government should not only provide the channel for people to ask what they should do with their stocks but also programs that can help to teach people the basic knowledge of the stock market. For example, how to look through the k line graph correctly and analyses it ra>onally. However, I am not too worried about the luxury bubble and the debt bubble as China will have a further growth in the future that even the debt level at current stage is high, the Chinese economy s>ll has the ability to afford it and the hobby of buying luxuries is the progress that each country will face in their development that once Chinese domes>c brands are beVer developed, the market will come back to China. Even people are s>ll buying same amount or even more luxuries from abroad as China coming through the Lewis turning point, the value of export itself can raise and help to eliminate the trade loss.

CONCLUSION To draw a conclusion, the Chinese Economy to an extent is a bubble economy as the existence of bubbles has been proved and their size is rela>vely large. Some of the bubbles have already shown their influence in the economy which might be fair for me to conclude that some of the economic growth in China is actually consist of bubbles which will not last long. However, what can’t be denied is that China has had a large economic development during the past 50 years. The income of people has increased over the years with the improvement in people’s living standard. However, the next step is to tackle those bubbles in the economy which the government already started to take ac>on as seen in the report earlier. The only concern is that whether the economy is able to afford the impact when the government is trying to tackle all the bubbles simultaneously. Looking back to last year’s crisis in the stock market, I think I am able to say that Chinese economy would be able to afford the impacts brought by the new policies as even as the crisis occurred and many people’s money has evaporated, the GDP is s>ll increasing with considerable speed. But the uncertainty s>ll exists as in order to tackle those bubbles, all the policies will need to be conducted strictly. However, if those policies do work, in the short run there might be a fall in confidence among people, thus, in the long run, the bubbles within the economy are likely to have their size decreased.

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is china a bubble economy? · growth is actually a bubble and that soon, this bubble will burst,...

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