Executive Briefings

When China's Bubble Bursts, the Effect Could Be Somewhat Muted

China's economic bubble will burst, but the effect is not likely to be as dramatic as many might expect. The main reason asset bubbles will deflate differently in China is because the Communist Party controls, well, everything. Free-market policies have not stopped the government from manipulating markets in ways that go well beyond what we would ever see in the West.

For example, officials can implement strict price controls that can effectively keep the population from feeling the ripple effects of a popped asset class, says Charles Freeman, who focuses on the political economy of China and U.S.-China relations for the Center for Strategic & International Studies. So if real estate values tumbled, the government could artificially prop up the prices of other things to keep the economy from buckling under the weight of deflation. And the government has strict capital controls in place that can keep money from leaving the mainland.

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China's economic bubble will burst, but the effect is not likely to be as dramatic as many might expect. The main reason asset bubbles will deflate differently in China is because the Communist Party controls, well, everything. Free-market policies have not stopped the government from manipulating markets in ways that go well beyond what we would ever see in the West.

For example, officials can implement strict price controls that can effectively keep the population from feeling the ripple effects of a popped asset class, says Charles Freeman, who focuses on the political economy of China and U.S.-China relations for the Center for Strategic & International Studies. So if real estate values tumbled, the government could artificially prop up the prices of other things to keep the economy from buckling under the weight of deflation. And the government has strict capital controls in place that can keep money from leaving the mainland.

Read Full Article