Insider

petrmalinak/Shutterstock

Why China Is Extremely Vulnerable Now

The majority of household wealth is at risk of vaporizing
Friday, August 7, 2015, 12:36 PM
Enroll NowFor enrolled members only. Enroll or Sign in to read the full article.
, ,

Executive Summary

  • Too much of China's wealth is tied up in housing
  • The Obvious Risk: Declines in demand will crush prices
  • The Less Obvious Risk: housing in China is very illiquid
  • China's extraordinary vulnerability

If you have not yet read Part 1: Is China’s “Black Box” Economy About to Come Apart? available free to all readers, please click here to read it first.

In Part 1, we looked at the factors that render China’s economy a black box: the inputs and outputs are visible, but the internal workings are often opaque. Though there is an abundance of data on China’s housing market, it too is opaque in critical ways.

Let’s dig into what makes China’s housing bubble so risky.

Chinese Household Wealth Is Mostly In Housing

The percentage of household assets in real estate varies from source to source, but however it’s sliced, China’s household wealth is extraordinarily concentrated in housing.

This means any reduction in housing values will have an outsized impact on household wealth and the perception of wealth, i.e. the wealth effect: people who own assets that are rising feel wealthier and tend to spend more freely as a result. Those with assets that are declining in value tend to feel poorer, even if their day-to-day life in unaffected by the drop in wealth. This is the negative wealth effect.

While middle-class households’ wealth is in their primary residence, upper-middle class households tend to put the family wealth in additional homes as investment properties. Anecdotally, it is not uncommon for middle-aged people with secure employment to own three flats: one for their residence and two as nest eggs. The practice of buying third homes was subject to restrictions a few years ago, but the resulting drop in housing demand scared authorities into...

 

Enroll Now
Or Sign In with your enrolled account.
Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

7 Comments on Why China Is Extremely Vulnerable Now

Enroll now or Sign In to read all member comments.