Thomas Aurelick, chief economist at Bloomberg, argues in a new book that China is "the bubble that never bursts."
The British economist magazine said in a report that Ulrich, in his book "China: The Bubble That Never Bursts," provides an unusually fair description of China's economic resilience that is analytically interesting and closely followed.
Fortunately for Aurelik - the magazine says - his definition of the Chinese bubble leaves him room for maneuver, as he does not refer to any specific market or obsession, such as the obsession that revolved around technology stocks this year;
Rather, it is to China's crisis-fighting economic momentum, which survived countless predictions of collapse.
So far, this unavoidable force is recovering with amazing speed from the Coronavirus (Covid-19) pandemic.
Although Aurelik does not rely heavily on economic theory to justify his confidence;
However, he derives some reassurance from it, the magazine says.
Bubble does not burst
The ever-bursting bubble appears to be the kind that the laws of economics should exclude, and in fact - the report says - theorists have long pondered the possibility of sustainable bubbles, inspired by the works of two Nobel Prize winners, Paul Samuelson in 1958 and Jean Tirole in 1985.
Samuelson and Tyrol have shown that bubbles can persist when the rate of growth of the economy consistently exceeds the rate of interest.
Under these conditions, the bubble could remain attractive and affordable, luring buyers, which it needs to support itself without dwarfing the economy.
Suppose, for example, that workers of each generation invest a portion of their income in a fundamentally useless asset, such as an empty apartment that they plan to sell upon their retirement.
And since each group has the same plan, they will each find buyers among the descendants of the assets that they bought from their grandparents.
Because another generation "always comes," says Samuelson, this chain is never broken.
If the economy were to grow, then each generation would have more income to spend on assets than the previous generation, and this would allow the seller to earn a positive return.
If the economy’s growth rate exceeds the interest rate, that return will be higher than what other saving methods, such as bank deposits, would provide, says the Economist report.
According to The Economist, China is recovering amazingly quickly from the Corona pandemic (Getty Images)
Managing the economic slowdown
According to research by Keji Chen of Emory University and Yi Wan of the Federal Reserve Bank of St. Louis in 2014, a permanent bubble could emerge.
This model states that private capital can achieve impressive returns as long as it can reap profits from cheap labor migrating from fields to factories or from state-owned companies to private companies, giving entrepreneurs the financial potential to venture large sums into the real estate market.
At the same time, they are aware that the profitability of their businesses will eventually decrease when the labor force becomes scarce, and this prompts them to distribute their wealth to other areas of value, such as real estate.
According to this scenario, the magazine added, real estate prices will keep pace with the rate of return achieved by the entrepreneurial capital, which is higher than the growth rate of the economy as a whole.
As workers become more difficult to find, the returns to capital and property will gradually and simultaneously diminish.
In later chapters of the book, Aurelick explains how China managed this slowdown.
It should be noted that China started 2016, and it is in a fragile state, and real estate developers have been keeping massive inventories of unsold apartments, and owe enormous sums to shadow lenders, and China has also suffered from overcapacity in allied industries, such as iron, which threatened Plunging the economy into a financial downturn.
In this regard, it should be questioned how China has dealt with this situation, and the answer lies in the following five points:
Which:
Restructuring and adjustment of the economy.
Refinancing, rotating and writing off assets and liabilities.
China has readjusted the composition of the activity without slowing its pace.
Reducing spending on new mines and iron factories, while allocating a larger budget for infrastructure.
The projects financed with short-term, high-interest bank loans were refinanced with low-yield bonds issued by local governments.
Cleaning process
The magazine noted that China also canceled bad loans (including loans from the shadow banking system) and many tangible assets.
In addition, old mines were closed, slum clearing took place, and displaced families were granted funds to help them buy new apartments, efforts that were often financed by targeted loans from the central bank.
Licensing, closings and write-offs reduced wealth from the economy;
But it did not cut off the flow of new activities.
In fact - the magazine says - the combination of new money injected into the economy and the old energies removed from it has pushed up prices and accelerated nominal GDP growth.
This, in turn, restored the gap between growth and interest rates and facilitated support for debt levels.
The magazine explained that this cleaning process benefited from some of the unusual strengths in China, including the extent of the influence of regulators and the flexibility of its workforce.
For example, workers kept pace with the changing structure of activity;
But it was a formula compatible with some economic principles, which could be applied anywhere.
The financial recessionary pressure that China faced in this dangerous period also showed that there is room to stimulate the economy, and because interest rates were less than growth rates, it could have assumed any commitments it did not dare to write off.