Deflating asset price bubbles is a risky business. In fact, it is so fraught with potential danger that Alan Greenspan, the widely-revered former chairman of the US Federal Reserve, decided he would not even try. Rather than tighten policy in a deliberate attempt to control America's late-1990s technology stock boom, he reckoned it would be safer to let the bubble burst under its own pressure. The Fed would then step in to clean up the mess afterwards.
China's economic policy-makers want to appear to be made of sterner stuff. The interest rate increase announced last week by the People's Bank of China was aimed squarely at reining in runaway investment, especially in the mainland's galloping property market.
Whether Friday's increase, which lifted the one-year lending rate just a quarter of a percentage point to 5.85 per cent, will be enough in itself to prevent an eventual hard landing is doubtful. But the Chinese authorities obviously intended to send a clear signal that they are in earnest about slowing investment.
Despite a series of restrictive measures introduced over the past couple of years, China's investment in fixed assets, including properties, continues to expand at an uncomfortably rapid pace. In the first quarter of this year, nationwide fixed asset investment surged to 1.39 trillion yuan. That sum is equal to almost a third of China's gross domestic product for the quarter, and is up 28 per cent from the same period in 2005. Urban fixed asset investment grew at an even more feverish 30 per cent.
Of course, not all that money went into property, but a sizeable portion certainly did. According to official data, 17 per cent of China's fixed asset investment was sunk into real estate projects last year. In the first quarter of this year, developers invested 280 billion yuan in new construction projects, up 20 per cent compared to the first three months of 2005.
Much of that investment was funded by the country's banks. According to the central bank, at the end of last year bank lending to the real estate sector stood at more than 3 trillion yuan, or 15 per cent of all bank loans.
In fact, that figure probably underestimates the true amount. Company executives commonly mislead their bankers about the real purpose of the loans they apply for. They then divert the money away from core businesses and into speculative property developments in the hope of making a fast buck. According to some estimates, the true amount of China's fixed asset investment ploughed into the property sector could be 40 per cent, more than twice the official sum.