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China's looming property bubble

By Arthur Thomas - posted Tuesday, 23 February 2010

The GFC was a shock for the Chinese Communist Party (CCP): to maintain the confidence of the population China must outperform its western counterparts and Beijing has no option but to produce high growth.

China’s US$586 billion stimulus package was 67 per cent bank lending motivated, intended to boost domestic demand. The central bank was satisfied that record lending would achieve the 8 per cent GDP growth target for 2009. Banks willingly accepted the challenge so successfully that lending jumped 150 per cent to US$757.2 billion in the January-April 2009 period, exceeding the Beijing's US$732 billion limit for all 2009.

By the end of 2009, banks had lent US$1.5 trillion, around 33 per cent of GDP, of which an estimated 33 per cent of loans went into speculation.


China’s domestic stock market capitalisation jumped US$743.1 billion immediately following the implementation of the stimulus package lending incentives. Not recorded however, is substantial local government debt in off balance sheet transactions via their financial management arms that bypass state policy.

Beijing had assumed an early recovery of the global economy and stimulus spending would produce a surge in consumer demand and a resurgence of exports, foreign direct investment, employment, demand for commercial and industrial floor space, and push property and stock market values higher. But slow global growth in China's major export consumer economies, combined with crises in the Euro zone suggest that business as usual with China could be a long way off, as will amortising China's massive infrastructure spending debt.

China's property boom relies on data showing strong demand, sales and rising prices.

Increasing references to a bubble in China's property market is fuelling speculation of threats to both China's and global economies. Comparing China's property market with those of developed nations risks serious miscalculations.

Assessing the risk of this boom-bust scenario is complex and challenging and requires an understanding of China's five-year plans, property market development, developers, state bank and local government involvement, land acquisition, role of the media, government driven background forces, widespread corruption, speculation, investors, and homebuyers.

Information quality

Regardless of reported market related events, it is wise to remember that all information classified as not being in the interest of the state, meets the criteria of state secrets. Beijing and state media effectively censor sensitive information.


Recent boom to bust history

Outside China, many nations gained valuable experience from the financial pain of several resource, property, and technology booms and busts over the past three decades. China was isolated from that learning curve, its population lacks exposure, education and comprehension of a capitalist society and related financial risks. China also lacked opportunities.

From 1949, China was a classless society and the CCP ruthlessly suppressed all symbols of personal achievement and contact with the outside world. Information was the exclusive domain of state controlled media mixing domestic issues with large doses of propaganda, information of the outside world restricted only to those events of use to Beijing for propaganda purposes.

New opportunities, new wealth

Decades of low expectations and despair suddenly changed under the leadership of Deng Xiao Peng and his proclamation of "Poverty is not socialism. To be rich is glorious."

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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