Over the last few years, there has been a tremendous growth in the Chinese economy. Financial analysts world over have likened this growth to a bubble waiting to explode. The person who set off this “bubble debate” was the perceptive financial mind Jim Chanos who is credited with predicting the fall of the once robust Enron.
Chanos views the economic growth that China is experiencing today as too good to be true. Like Enron and other highflying companies whose fall came after experiencing a phenomenal growth, Chanos warns that the Chinese economy is headed for the same fate.
This talk of a bubble waiting to explode is worrying many investors who view China as the sole solution of lifting the global economy out of the economic downturn being experienced worldwide. Chanos predicts that China will produce a worse fate than the one that was experienced in Dubai. Although some analysts claim that Chanos and his ilk are wrong on the Chinese issue, we are still left with the question of whether the Chinese economy is really a bubble waiting to explode. (Nusbaum)
One thing that makes this subject relevant to all of us is the effect that it might have on the world’s economy. The fact that China is expected to contribute to about a third of the world’s growth this year makes the issue a global concern. With the United States undergoing a period of financial recession, China is believed to be the catalyst that will lift the world’s economy from its state. If the talk of a bubble in China’s economy is indeed true, then the world might as well be headed towards a worse financial crisis.
This should also be used as a warning to investors who are rushing to invest in the lucrative Chinese markets in the hope of getting better returns. It is important to approach this whole issue with a lot of caution to avoid causing unnecessary panic in the financial circles. On the other hand, China’s position in the world economy calls for its special treatment since in the case that the bubble does indeed “burst”, there is bound to be numerous consequences.
Currently, China is the third largest market in the world after America and Japan. By the turn of this year, the country is expected to occupy the second position. There are projections by financial bodies estimating that the Chinese economy is bound to grow at double digits in the coming few months. In the event that the Chinese economy crumples, it might set the pace for another round of global recession.
Personally, I think that the talk of a bubble in China’s economy is overrated. Although I agree that any economy with a rapid growth as China’s is usually fragile, I refuse to agree that the decline will be momentous. The most important thing to understand is that any given economy has the ability to grow at an upward or downward trend. Today, most Chinese citizens are leaving the rural places in search of a better life in urban places.
This calls for more construction to accommodate this growing migration. This fact alone rubbishes the whole talk of a bubble in the real estate since more houses are still required in the near future to cater for the increasing population. I also find it interesting that Jim Chanos who came up with the talk of a bubble in Chinese economy only created interest in the country a few years ago.
Nusbaum, Roger. Is China’s Economy Another Bubble? 2010. Web. Sep 27. 2010.