Bubble problems in China - can we have a soft landing

Fan Gang who sits on the monetary policy committee of the People's Bank of China told reporters that surging asset prices were the "the real worry" for the economy, according to a report by Dow Jones Newswires.

Fan also praised recent efforts to rein in excessive liquidity as "good, timely and necessary," even while he downplayed inflation risks, saying gains in consumer prices were unlikely to be a major problem this year because of spare capacity and stable food prices.

The property bubble is real. According to friends in China, property is used as a place to park your wealth. There is less trust for the stock market. Lending increased much beyond economic growth and this credit is moving into real estate. Chinese property prices rose 7.8% y/y in December, government data show, though the national average masks significant regional price gains.

The government is aware of the problem and is taking some steps to control the market, but bubbles will take on a life of their own as the herd reacts to the market. Reserve requirements have increased and there has been re-imposed a national sales tax for real estate sold within 5 years. The tax used to be for a two year time period. The government told banks to raise interest rates on third mortgages and demand bigger down-payments, a person with knowledge of the matter said. The China Banking Regulatory Commission warned lenders of the risks from “hot money” flowing into the property market. Tough talk is not enough.

There is mounting evidence that the market is responding sharply to Beijing's gradualist moves to tighten up the housing market, with the official China Securities Journal reporting Tuesday that the volume of sales in the secondary market plunged nearly 70% last month over December, and those in the primary market dropped over 45%.

The Beijing News, the capital's main daily newspaper, cited loan officers of the Bank of China on Wednesday as saying that the lender has already abolished its 30% discount on government-set mortgage rates. The best rate that the bank now offers is a 15% discount, and even that requires a strong credit record, the officers said.Developers are also being squeezed by the banks following a series of warnings from the authorities for lenders to tighten up their risk management and avoid excessive exposure to the real estate market. China Business News, a Shanghai-based daily, cited industry sources today as saying that several lenders have either completely stopped extending loans to developers or have cut back on their supply of credit.

Rating agencies are aware of the issue and Fitch has downgraded some banks which have large commercial real estate exposure.

his hole approach is in marked contrast to the US where there was more of a "head in the sand" approach to real estate problem. We may be able to get a soft landing here but this is worthy of careful attention.