Like all the other economy bubbles, China's economy bubble started with a compelling economic growth. All the bubbles that have formed in the history like the US bubble and Japan's 1980 bubble started legitimately but popped badly in the end. China's economic bubble is no different. Though it was able to get people out of poverty, it ran into problems.
China's economic boom started with the economic reforms in 1978. These reforms were able to create great opportunities and greatly influenced the Chinese economy. The availability of foreign investment in the 1980s and the banking reforms of the 1990s significantly contributed towards the economy. Having a large number of industrious workers and low wages was also an advantage for China. As a result, it was able to become one of the world's most manufacturing powerhouses. Urbanization also increased rapidly. The strategy of the Chinese was paying off as the yearly GDP growth rate was 9.5% during the period of reform i.e. 1978 to 2010. Although China has been growing rapidly, it entered the ranks of the largest economies in the mid-2000s.
In 2008, China faced a housing bubble which could lead to an economic crisis. This forced China to launch a stimulus program to start investing in an infrastructure project, housing projects, and rebuilding areas. It was able to create employment, demand raw material, and provide new ground to invest in for people. New money was created, but this caused the old money to lose its value, which immediately caused inflation. The stimulus caused many new projects that were useless. In fact, many cities were created and are now termed as ghost cities. Many areas were even developed needlessly just to support the economy.
The fast economic growth, expanding credit bubble, and the fresh stimulus money created inflation. High inflation and few investment opportunities become the reason why people started buying real estate to protect their saving. Due to this, the housing prices rose to about 140% near 2007 to 2011. Many people began to buy real estate as if they were buying fruits. Now, the housing price ratio with income has become 27:1 in Beijing. Social problems have also emerged as people were unable to get married as they could not afford an apartment.
The soared prices of real estate and the funny money generated because of the Chinese economy created a strong desire for luxury goods. Income generated during the false prosperity period is more likely to be spent on luxuries compared to the money acquired through hard work. The sales of high-end luxury products have also increased. Bubble drunk Chinese have been spending lavishly, which could become a danger for China in the future. The rapidly growing economy may seem good but can produce bad results for the Chinese. They should focus on stabilizing the economy or else they might face consequences in the future when the bubble pops.
