Should investors be wary of China?

ByABC News
August 1, 2012, 7:44 PM

TIANJIN, China -- Jingjin City is about 120 miles from Beijing, but few people live in the sprawling development. No train or subway goes there. Jingjin City has no hospital. No kindergarten. No supermarket. Grass grows man-high outside the unoccupied villas.

And the developer is still asking too much for the houses. "I think only a rich boss will buy a villa here for his mistress, and even a mistress won't live here because there is no entertainment," says Tian Yongsheng, 47, a private taxi driver.

Ghost developments have grown more in China, making China-watchers uneasy. While all eyes are on Europe's debt woes, economic news out of China is starting to become alarming, too. China's gross domestic product grew at a 7.6% annual pace in the second quarter of 2012, the slowest rate since the first quarter of 2009 and down from a high of more than 14% in 2007.

China cut interest rates twice in June in an effort to boost its slowing economy. But cracks are showing in China's housing market and its banking system. Is China starting to go down the same path as Europe and the U.S.?

Probably not. Even if China's economic growth were to slow from its current pace, the country's economy would still be steaming along much faster than the U.S. and Europe. But in a country as big as China — and with what critics say are such opaque economic statistics — the truth is hard to discover, and investors should be particularly wary.

The Chinese government had been tapping the economic brakes since 2008. In 2007, China's GDP grew at a feverish 14.2%, according to the World Bank. Alarmed by the risk of inflation, which hit 5.9% in 2008, the government slowed down on infrastructure projects and began to slow bank lending.

China's effort to reduce inflation without causing a recession was largely successful. Chinese inflation was just 2.2% in June. But just as the Chinese pulled in the reins, the U.S. budget-ceiling standoff and the European crisis added extra, and unexpected, slowing pressure on its economy. Chinese net exports — exports minus imports — fell from about $300 billion in 2008 to about $150 billion in 2011.

Making matters worse: a possible housing bust. China is a massive country, and all real estate markets are local, so it's hard to get a clear picture of the Chinese housing market. Furthermore, there's widespread distrust of some official Chinese numbers. "It's hard to know what to believe at times," says Michelle Gibley, director of International Market Analysis at Schwab Center for Financial Research on European and Chinese economies.

Soaring home prices

At Moon River Castle Apartments in east Beijing, fewer than 30% of the parking spaces were filled in one building, and only a few apartments appeared occupied. There were no stores on the first floor — only a small supermarket.

But Moon River management says the vacancy rate is low and sales are brisk. "We wish our clients living here have a life like the song Moon River— elegant, high-end, like the American middle class," says Zhou Yun, 31, a manager at the complex's marketing department.