China’s economic boom has been like nothing the world has ever seen, and that financial might will continue translating into political capital. But is the country headed for a painful correction similar to the one experienced by Japan in the 1990s? Perhaps, and that doesn’t even take into consideration a gigantic older population that will need to be supported as modernization increases lifespan. From Martin Wolf at Financial Times:

…why should anybody doubt China’s ability to grow quickly for years?

The first reason is that growing very quickly is rather like riding a bicycle: it goes well so long as speed is maintained. Once it slows, however, a bicycle starts to wobble. This is why managing deceleration is so hard. The second reason is crucial: the Chinese economy is highly unbalanced. Slowing an unbalanced economy is particularly hard.

A salient aspect of the unbalanced economy is the high savings rate and thus its reliance on investment as a source of demand. Yet, as the economy slows, the demand for investment is likely to fall more than proportionately. The reason is that past investment was done on the assumption of annual growth at 10 per cent. With growth substantially slower, excess capacity will be chronic. What do people do when they have excess capacity? They stop investing. That is also why China’s government needs to keep growth up: if it fails to do so, investment might collapse, with devastating effects.

That is not all. The combination of a debt overhang with a slowing economy is particularly damaging. Yet that is what the credit-fuelled, property-related investment boom has created. As growth slows so would the ability to service debt, even if underlying investments might ultimately be profitable. This decline in debt-servicing capacity would generate a “balance-sheet recession” in demand. That would add to the adjustment to investment outlined above. This combination is what laid the Japanese economy low in the 1990s.

If the Chinese economy is to shift into its new normal on a stable and sustainable basis, it has to avoid any such collapse.•

I read once that if the population density of Brooklyn was applied to the whole of America, we’d be able to fit everyone into New Hampshire. Now, New Hampshire would most likely become a real sty, but it shows how inefficiently we’re using our land.

I don’t think any of us want rampant and unrelenting building in every nook of each neighborhood, but it’s clear that U.S. home prices are jacked up artificially by overaggressive zoning laws. There has to be a middle ground. From an :

BUY land, advised Mark Twain; they’re not making it any more. In fact, land is not really scarce: the entire population of America could fit into Texas with more than an acre for each household to enjoy. What drives prices skyward is a collision between rampant demand and limited supply in the great metropolises like London, Mumbai and New York. In the past ten years real prices in Hong Kong have risen by 150%. Residential property in Mayfair, in central London, can go for as much as £55,000 ($82,000) per square metre. A square mile of Manhattan residential property costs $16.5 billion.

Even in these great cities the scarcity is artificial. Regulatory limits on the height and density of buildings constrain supply and inflate prices. A recent analysis by academics at the London School of Economics estimates that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away.

The costs of this misfiring property market are huge, mainly because of their effects on individuals. High housing prices force workers towards cheaper but less productive places. According to one study, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight limits on construction.•