Reflating the dragon

China’s economy is beginning to look out of breath after a near decade of astounding growth. It is clear that there is no decoupling between the West and emerging markets. The two are actually even more deeply integrated due to outsourcing and cross-border investment.

This means that financial crises can spread faster than ever before. However, China’s real estate markets may have been slowing before the credit crunch struck and prices of some buildings have now fallen by up to a third in value, but they have fallen for different reasons to those in the West.

The Chinese government made it happen, deliberately, by restricting lending and tightening up building laws. It wanted to curb what it saw as dangerous speculation.

Meanwhile, Morgan Stanley Real Estate has been putting some of its properties in Shanghai up for sale – a move seen by some as calling time on the sector. Estate agents are reporting a rise in the number of price-cuts as developers grow more desperate for cash.

But others see this is an opportunity. Merrill Lynch has just raised a US$2.65bn Asian real estate fund homing in on what it sees as excellent medium to long-term prospects across the region. Besides, China’s real estate downturn might turn out to be less severe than elsewhere.

There have been two interest rate cuts, restrictions on bank lending are being eased and measures are being passed to stimulate the economy. There’s also a raft of infrastructure projects, some new, some brought forward, to help the economy. Real estate accounts for about a quarter of China’s fixed-asset investment.

Meanwhile, policy makers want to shift the driver of growth away from exports and more towards domestic consumption. One mooted measure is to allow farmers to sell certain types of land they use. This could be important because most of the Chinese population is still agrarian and earns only a few hundred dollars a year. Selling land could significantly boost their spending power.

There’s also talk of bringing in social security measures and workers’ rights are being increasingly protected. This may encourage the Chinese to become a little less thrifty – they save 50% of their income – and to spend more.

It is still very early days and the impact of many of these measures will take a while to be felt. However, the state needs to keep the economy growing by at least 8%–9% a year and to create jobs for the sake of social harmony. The incentives to reflate the dragon are therefore high and investors will at least be betting on the same side as the government. And in a command economy that can be crucial for success.