The View | Why China is cooling, not deflating, the property market bubble
- Beijing depends on China’s property bubble for revenue and has been managing it by keeping a lid on inflation
- But the yuan’s soft peg to the dollar means Washington’s decisions – and addiction to stimulus – have an impact on China’s asset prices
Tightening measures have been put in place to cool the market. If the past pattern persists, tightening will continue until worries about economic growth dominate again. This surge-pause-surge pattern has defined China’s property market for the past 15 years.
The cumulative effect is a bubble on a scale not seen before: the value of the housing stock is some six times GDP; funds in property construction are half the gross domestic product; debt has surged to around 350 per cent of GDP, and; in big cities, the average property price is around the average yearly disposable income per square metre.
The seeds of the latest boom were sown during the trade war. Amid pessimism, the government loosened the credit spigot in 2019, then had to keep it open for another year during the pandemic. China’s outstanding total social financing was 284.8 trillion yuan (US$44 trillion) at the end of December 2020, up 13.3 per cent from a year earlier, while China’s GDP grew 2.3 per cent to 101.6 trillion yuan last year.
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Cheap housing but few economic opportunities for young Chinese in city along Russian border
The difference between these two sets of numbers raises the question of where the borrowed money went. Obviously, there has been hanky-panky in credit creation and circulation. For a long time, the government looked the other way because such irregular activities were supportive of short-term fiscal and economic stability.