Chinese Economic Bubble

I dont usually post on general economic news and indicators, unless there is a specific tie in to the fine and decorative art markets. 

Last week an opinion piece in the NY Times by noted economist Paul Krugman on the Chinese economy and potential bubble got me thinking about the current strategies of the large auction houses by focusing on the Asian market in general, and specifically mainland China. 

I know many of the current strategies of the large international auction houses are focused on the BRIC nations overall, but I believe the investments in the Asian market, as well as future income reliance from China now outpaces other geographic regions.

Krugman compares the current situation in China to the recent US real estate bubble and the subsequent US economic decline as well as the Japanese bubble in the 1990's.  The economic parallels Krugman points out are very interesting, and also concerning giving more and more economists are becoming bearish on the ability of the Chinese market to maintain its preset rate of growth.  I wonder if the major auction houses are re-evaluation their growth strategies and reliance on Chinese collectors for the Asian markets.

Krugman reports in the NY Times

I’ve been reluctant to weigh in on the Chinese situation, in part because it’s so hard to know what’s really happening. All economic statistics are best seen as a peculiarly boring form of science fiction, but China’s numbers are more fictional than most. I’d turn to real China experts for guidance, but no two experts seem to be telling the same story.

Still, even the official data are troubling — and recent news is sufficiently dramatic to ring alarm bells.

The most striking thing about the Chinese economy over the past decade was the way household consumption, although rising, lagged behind overall growth. At this point consumer spending is only about 35 percent of G.D.P., about half the level in the United States.

So who’s buying the goods and services China produces? Part of the answer is, well, we are: as the consumer share of the economy declined, China increasingly relied on trade surpluses to keep manufacturing afloat. But the bigger story from China’s point of view is investment spending, which has soared to almost half of G.D.P.

The obvious question is, with consumer demand relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.

Krugman concludes with the following

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

Source: NY Times, click HERE to read the full OP-ED piece.