The wealth effect of the property bubble
clearly has important implications for China.
In the short term the housing boom provides meaningful
support for the economy on the consumption
side, which has boosted consumer confidence,
imports, and short-term loans while even
propping up retail sales. But the effect is unlikely
to last forever because consumption is not
supported by economic fundamentals but by price
increases. When property prices drop, Chinese
households may have to cut consumption.
The wealth channel may, depending on economic
circumstances at the time, amplify rather than
dampen economic stress.
This is not just a story for China but for the
world. China’s wealth effect has been a
supportive force for the global economy since
2010, though its contribution has not always been
acknowledged. As mentioned earlier, incremental
demand from China (excluding processing
imports) has become more important than that
from the US in 2016 and the first half of 2017.
But the wealth effect also has a meaningful
impact on Chinese and global current accounts.
A current account surplus is simply the
difference between what the country saves and
what it invests. China’s current account surplus
is shrinking because of the rise of domestic
demand. Because higher consumption levels
have the effect of depressing savings they also
contribute to a falling current account surplus.
In the past four quarters, China’s current account
surplus dropped to 1.2 per cent of output from
9.9 per cent in 2007 and 3.0 per cent in 2015.
If property prices continue to rise, the wealth
efect would rise further and drive China’s
current account surplus even lower. But in doing
so, the world’s savings and investments have to
balance out. Therefore, greater dissaving in
China would arithmetically force greater saving
elsewhere in the world, a development that
would be transmitted – all things being equal
– by higher rates.