China property bubble risks

The BOC tried to tighten credit last year in order to stop what could be a property bubble especially in the large coastal cities. Now there are trying the thread the needle through lowering rates without a housing bubble. It may not be possible.

Real estate construction represents 11% of China GDP, so turning off the real estate boom is trouble for growth. Although it lowered rates, it provided a special warning to financial institution that they should “continue to suppress speculative investments in housing”. The question is whether banks will be willing to avoid real estate loans which have been a key source of revenue. There is strong over-building in second and third tier cities and many Chinese belief that prices will not be able to increase substantially as reported in survey data.

Long-term loan growth is the lowest in well over 10 years and the short term loans are growing at rates comparable to early 2011. Copper imports are down and industrial production is below 10%, so it is unclear where new loans are going to be made.

So let’s get this straight. China wants more lending, but not in real estate which has been a key driver in the economy. So who is going to borrow the money?