Revisiting China’s property bubble: Andy Xie

BEIJING (Caixin Online) — The market is speculating that the central government is about to loosen up financing for the property sector. What this really means is that the banks may increase lending to developers for land purchases.

Property developers are beholden to local governments. If they get loans, they will buy land to boost local government revenues. Essentially, bank loans would turn into local government revenue. When the local governments spend the money, it becomes a form of fiscal stimulus.

When the economy was growing rapidly, the property bubble was justified on reflecting high future income through extrapolation. As the economy slows, the justification is that the property bubble is needed to support the economy. Neither is meaningful unless monetary and/or credit policies are affected.

he latter argument was undoubtedly a force in influencing the 2008 policy to massively boost credit growth. Even though this policy is the reason for most economic difficulties today, the same argument is being used again.

If China tries the same policy, it will not produce the same results and may trigger a financial crisis quickly.

In 2008, the Federal Reserve was just beginning its unprecedented quantitative easing policy. The bearish sentiment towards the U.S. dollar allowed emerging economies to boost money supplies without worrying about devaluation. Further, China’s credit policy then was looked upon positively by the international community as contributing to stabilizing the global economy.

If China were to pursue the same policy now, the opposite would be true on both fronts.

The Fed is about to begin its tightening policy. And the U.S. has a strong stock market and recovering property market to attract global capital.

Emerging economies have to tighten monetary and credit policies to maintain their economic stability. A repeat of 2008 policy would immediately lead to capital flight and currency devaluation. The resulting inflation could totally destabilize the economy.

Further, there is consensus in the global financial market that China’s property market is a bubble. If some policy is introduced to prolong it, the negative segment would worsen, triggering massive short selling of the yuan.

The resulting devaluation pressure would be self-fulfilling, leading to a financial crisis similar to Asia’s in 1997.

The bigger bubble

While the residential bubble is well known, the commercial side has quickly become a bigger bubble. Most cities have commercial space per capita higher than in developed countries.

Yet, they are building much more. Purchase limits have been imposed on residential properties in recent years. Much of the speculative excesses have been diverted to the commercial side. This is why the building of commercial properties exceeds that of residential properties.

The hotel market is a good example. The overbuilding is apparent. The occupancy rate for hotels is low. Most aren’t making money. Yet, so many more are being built. Banks will suffer a huge amount of bad loans in this market.

Individual investors have been speculating in retail properties. The average yield in this market has fallen to the same level as in the residential market. With so much more under construction, the rents will only fall further. Widespread bankruptcies in this market are quite likely in the coming years.

http://www.marketwatch.com/story/rev...xie-2013-08-12