On the ground again

As my plane dipped below the Pearl River Delta smog (or sea-mist as locals prefer to call it), I took a deep breath in anticipation of my return to the fastest-changing and most interesting country on the planet. I was also preparing for the paradoxical phenomenon I have grown accustomed to – of somehow understanding less about what is going on in China when in the thick of things than when watching the country from afar.

Perhaps it?s the sea-mist getting into the brain or perhaps it's because so much is happening and at such a phenomenal pace that it is hard to make any bold statements or predictions without qualifying them with so many disclaimers as to make them pointless.

The more interviews you conduct with the 'person on the street', with taxi drivers (a favorite interview subject of journalists because they can be interviewed on the way to work or a bar) or with analysts, the muddier your conclusions become; there is always someone on hand to provide a contradictory opinion.

In fact, there are analysts who make their entire living being contrarian – whichever way the general consensus seems to be swinging they run the other way. In some ways the best thing for a China-watcher to do is to point out some interesting trends and ask the audience to watch this space.

My first emotion on returning to China was one of vicarious pride. It all seems bigger, richer, more confident and more assertive. At least some of the 'China Dream' is becoming a reality in terms of its economy. At the same time, stunning ignorance of the country and large dollops of Orientalism seem to have blinded the rest of the world to the endemic problems and gaping pitfalls facing China's government and its subjects.

Social stability
The management of social instability arising from a host of internal problems is every bit as important to the nation's leaders as management of the much-touted "peaceful rise" foreign policy of the world's next superpower. The first tangible thing I noticed was the same preponderance of construction sites and cranes (often called China's national bird) as when I was last here. Over the last year the recurring theme in the China story has been government initiatives to cool overheated sectors of the economy, especially property and construction. You'd never know it. From the window of my downtown apartment in southeast China there are construction sites as far as the eye can see and the building shudders constantly from the concussion of enormous explosions blasting sites to lay foundations.

Obviously, attempts over the last year to stop speculation and rapid price increases in the urban coastal property markets are not deterring investors from throwing up towers just as fast as they can. This has led to a series of directives from Beijing since early March this year aimed at pushing local governments to rein in property prices. These include raising the minimum deposit and interest rate on mortgages, encouraging capital gains taxes in some areas and launching probes into property lending at state commercial banks in some cities.

The challenge for the government is to slow things down enough, but not too much – a dangerous balancing act with the potential to bring about the very outcome that they're trying to avoid.

Beijing fears a property bubble is being exacerbated by so-called 'hot money' flowing in from overseas investors speculating not only on rising prices but also on the prospect of a revaluation of the RMB. If the RMB is finally revalued upwards (following two years of speculation and recently increased pressure from trade partners) then the value of any Chinese assets increases by a corresponding amount, making investing in the runaway urban property market seem like a doubly good idea.

A pop here, pops everywhere
The problem is that if the bubble were to pop and housing prices were to see a significant drop, the repercussions would be felt throughout the entire economy. Because much of the property investment has been made using cheap credit from China's state-owned commercial banks and because the proportion of new mortgage loans on these banks' books is so high, a crash in the property market could mean a crash for the already frail banking system.

And a property crash would badly damage the fortunes of the new urban middle class – exactly the sector of society the government relies on for continued social stability.

Now I've arrived at the part where I say whether I think a crash is imminent in the property market or not.

Instead, let me tell you about the great Sinologist John K. Fairbank, after whom the Harvard Center for East Asian Research was named. He liked to present visitors with a thick book entitled What I Know About China.

The pages were all blank. I cannot even begin to speculate what he would have predicted. Watch this blank.