Sunday, October 18, 2009

The Debts of the Lenders: Chinese Real Estate Market Frenzy (Again)

Just like its largest trading partners in the UK, US, and (to a more limited extent) the EU, Chinese bureaucrats have flooded the system with liquidity in a bid to boost asset prices. These measures were enacted to stave off the very real threat of a global deflationary bust. Cynics also noted that the policy effect was really aimed at protecting the interests of the wealthy.

Well, look no further than this latest Stratfor report on the Chinese real estate bubble.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.


After all, let's not get too concerned about exports - China's #1 growth driver.

Why not just give a loan to anybody with a pulse? Especially those recently graduated from college with poor job prospects?

They can put that cash to good use speculating in other things besides real estate.

Of course, Chinese officials may want to revise earlier statements about inflation in light of what is happening:

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