The recent stock market sell-off was driven mainly by the turmoil in China, which is dealing with the precipitous deflation of a stock-market bubble and is struggling to maintain its economic growth. If China’s economy continues to head south, what might that mean for U.S. commercial real estate?
China Likely Needs to Re-Balance its Economy
A mid-September report showed that growth in China’s investment and factory output missed forecasts in August, indicating a further cooling in the country’s economy that is likely to prompt the government to roll out more support measures.
Still others believe that there is a significant private sector in China that works, if only the government would give it more freedom. The country’s manufacturing sector, which is almost entirely controlled by private firms, remains the world’s most formidable. The private sector generally has created almost all new urban jobs in the past decade, and now employs about four-fifths of workers.
This growing private sector has the burden, as it were, of leading China’s economy forward. And that economy is likely to grow, for several reasons. China is transitioning away from investment-led growth, and towards consumption-led industries and services.
China will also likely become more inventive, coming up with new products and services – Chinese businesses are already good at business-process innovations designed to increase efficiency. And the current debt-driven growth model is sputtering, with too many state firms shoveling money into white-elephant projects. Chinese officials have admitted that markets need to have a “decisive role” in the domestic economy.
How Might U.S. Commercial Real Estate Be Affected?
Assuming that China needs some time to reform itself, though, what is the likely effect of the current slowdown on U.S. commercial real estate markets?
In certain areas where Chinese investors have been particularly active, real estate markets may well see some slowdown. In Southern California, for example, the recent turmoil could sap demand from markets such as Irvine and the San Gabriel Valley, which Chinese families have poured into in recent years. Some local observers there have noted that they’ve seen fewer Chinese buyers shopping for homes over the last month.
But some observers aren’t so convinced. Christopher Thornberg, founding partner of Beacon Economics, believes that slowing growth abroad won’t slow investment because Chinese residents will become more inclined to move money into what they consider a safe investment. “If anything, this is only going to intensify the push to get money out of China,” he said.
In any event, the commercial real estate market is driven more by the usual demand drivers and by the economy generally than by stock market fluctuations or country-specific problems abroad. Many observers believe that China’s problems won’t have an outsized importance in the U.S. Total U.S. exports to China are less than one per cent of GDP, and less than 2% of the S&P’s 500’s revenues come from sales to China. China’s slowing growth has already put downward pricing pressure on commodities – but for the U.S. economy cheaper commodity prices are generally a good thing, putting more money in consumers’ pockets and lowering production costs. And since China is a creditor to the rest of the world, not a debtor, it seems unlikely that a financial crisis will develop from its current troubles.
The world was expecting that China would soon become much more important to U.S. companies or exporters. It now seems that that time may now take longer to arrive, and stock markets may go down to reflect this changed long-term outlook. Unless any market moves are severe and long-lasting, however, it seems difficult to see what measurable impact that might have on corporate investment or consumer spending. In view of that, it’s unlikely that U.S. commercial real estate markets will be much affected by China’s current troubles or the related gyrations in U.S. stocks.
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