The future of the Chinese economy

Academics

IE Focus | By Rafael Pampillón, Professor at IE Business School

One of the major landmarks of the 20th century has been China’s spectacular awakening, but the country now faces a series of challenges that will require deep change to maintain rates of growth.The economic boom in China is one of the most important events of the 21st century. The boom has come on the back of China’s great demographic potential (with a population of 1,350 million), its high internal rate of saving and the way it has opened up to the rest of the world, turning it into the biggest exporter on the planet. 

Since 1978 the economy has been gradually freed up and prices have been progressively deregulated. There has been encouragement for foreign investments and the private ownership of businesses has been made legal. In 2001, foreign trade was deregulated when it joined the World Trade Organisation. Since then, China´s trade relations with the rest of the world have grown spectacularly.

As pointed out in a recent article by Enrique Fanjul, former trade director of the Spanish Embassy in Peking, China´s economy still has an unquestionably high level of state intervention and state businesses continue to play a key role. However, it cannot be considered as a socialist economy: most of the production takes place under private-sector conditions and products are marketed at free prices. There is a tendency towards a growing importance of private players in the economic system

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Spanish Real Estate – Promotors of the crisis

Academics

IE Focus | By Barbara Huerta, Professor at IE Business School

Real estate promoters have been largely responsible for the crisis that has affected their sector so badly, and now they are finding out exactly where their business plans went wrong.´Own less to owe less´. With these words, Rafael Santamaria, CEO of Reyal Urbis, summed up his new business strategy at the end of 2008. The liquidity shortage and extremely high debt payment commitments meant that all real estate companies in the country had to let go of their assets. But how did this change in fortune come about in a sector that was heavily in debt only two years before taking on ambitious corporate projects? With a view to answering this question, I did a research project that led to my writing the book Promotores de la Crisis (Promoters of the Crisis) (Lid). In the book, I analyse the impact of the international financial crisis on the financial system and real Spanish economy and its impact on leading Spanish real estate businesses. 

When did they start to blow air into the real estate bubble and why? Everything began with a positive macroeconomic environment, low interest rates and consumers who wanted to consume. But could such an illusion ever have been maintained indefinitely? We would soon see that it couldn´t. Those responsible for the monetary policy, albeit somewhat late, took measures to prevent overinflation by upping the interest rates. What would happen when the higher rates translated into an increase in the financial burden on homes and enterprise? The highest rates reduced the amount of income available to families. In addition, from mid-2007, families that were overwhelmed by the credit crisis started to encounter difficulties in obtaining mortgage loans and consumer credit. Liquidity was short, prices were still high, there was a general lack of confidence and the outlook for the deceleration of the construction and real estate sector was less than optimistic. 2008 confirmed expectations: the situation was getting worse.

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