Last week in Hong Kong, a single bottle of wine sold at auction for $93,000 to a Chinese buyer. No matter how good the vintage, that’s not something to pop a cork over and celebrate. Those who witnessed Japan’s spectacular rise and fall in the 1980s should be getting a familiar feeling watching China these days. Its decades of double-digit growth, military modernization, hosting of the 2008 Olympics, and picture perfect celebration of the 60th anniversary of the 1949 Communist victory have raised the People’s Republic of China to the top rank of global powers.
Yet unsettling questions about the social effects of this stunning climb are also abundant. An emerging asset bubble is highlighting the unequal distribution of economic gains, and raising doubts about the sustainability of current consumption patterns among the newly wealthy. While heralded for being the first to pull out of the current global economic crisis, China may be headed for a crash similar to Japan’s if certain trends continue. That would be devastating not merely for China, but also for a global economy just beginning a recovery.
How efficiently are resources allocated in China at both public and private levels? Observers have long noted with concern the growing income gap between the affluent coastal belt and the immiserated interior. Yet the economic haves are not simply outstripping the have-nots; they are increasingly profligate and wasteful. Western media have celebrated China’s new millionaires, nearly half a million of them, putting the country in the number five spot globally. These plutocrats are building gigantic mansions and sporting fleets of autos (the massive carbon footprints of which are also ignored by Western pundits). Builders have transformed China’s urban skylines over the past two decades, yet over-building has led to increased vacancies and heavy debt holdings, and vacancies in major cities has risen by double digits in the past year. While Beijing has managed the country’s macro-development better and for longer than most observers would have imagined, the structure may be coming under increasing strain, but not from purely economic causes.
If a crash is coming to China, it may come from the madness of affluent crowds. The danger is primarily social, although it will be manifested in economic form. Conspicuous consumption is spreading through Chinese society. That bottle of Chateau Petrus Imperial was sold in the world’s largest wine market, Hong Kong. Similarly, Chinese collectors fueled a nearly $24 million sale of “modest pieces” of Chinese art at Christie’s in New York in September, according to the New York Times, consistently paying between five and ten times the expected amounts. And Chinese buyers are just getting started, it seems.
A similar tale of excess unfolded in Japan in the 1980s. When land prices skyrocketed, paper profits followed. At the height of the bubble, the land under the Imperial Palace in central Tokyo was worth more than the entire state of California. Japanese investors bought up trophy properties around the globe, such as Rockefeller Center and Pebble Beach, for highly inflated prices, and one investor paid $40 million for Vincent Van Gogh’s “Sunflowers.” Japanese officials and business leaders believed in their infallibility, publicly deriding American society.
Just like today with China, pundits, investors, and the media largely proclaimed that the Japanese party would go on forever. Today, the sophisticated management of the Chinese Communist Party is offered as proof that China will always experience growth (or if contraction, then a soft landing). Back in the 1980s, Japanese companies were assumed to have discovered the secret to hyperefficient production and thus endless profits. Inefficiencies, poor management, and a sclerotic bureaucracy were all ignored by those who wanted to believe. Yet such weaknesses were exacerbated by a culture of excess that destroyed consumer reality. Once it took root in Japan, expectations changed permanently and traditional restraint was abandoned. The economics fed and then followed the social disease. Eventually, the asset bubble burst and the whole edifice came crashing down.
This is the larger danger in China’s future, except that it might be even more destabilizing to a country that has such uneven economic growth. To control it, the Chinese Communist Party will have to clamp down on the very economic exuberance that has driven the country forward. Failing to rein it in, however, could prove devastating, especially in a country whose majority remains poor and hostile to the authorities. China has seen enough social revolution in its history that no one should rule it out again, if fallout from the collapse of the wealthy hurts the countryside. There’s no way to predict if or when the system becomes a house of cards, but if the world’s auction houses continue to crow over massive Chinese purchases, then being a contrarian may be the smartest move of all.