All eyes on China’s property bubble

A recent report by the International Monetary Fund (IMF) states that China’s property market has indeed formed a bubble – but the fund says it is only restricted to larger cities and is not growing in extreme dimensions.

Having heard that the Fed is about to pump further cheap liquidity into its markets, I was wondering whether this second round of quantitative easing will bring the USA back on the track of economic growth. But I was even more concerned about the fact that cheap US dollars could inflate prices on other markets around the world – especially on China’s property market. I thus researched the web for comments and analyses of this emerging property market and I found an article on www.businesweek.com as well as one comment of former Nobel Prize winner Joseph Stiglitz on wall street journal (www.wsj.com). I would be pleased to receive your opinions about this issue. Feel free to comment on this.

The article “IMF Sees ‘Property Bubble’ in Big China Cities, Not Nationwide”, published on 21st October on businessweek online and written by Michael Heath, is showing the view of the IMF on the recent tensions of China’s property market. The fund explains that the price hike on properties is only a problem in larger cities and furthermore, this is not going to be an issue which will aggravate further: “A property bubble appears to be inflating in some of the larger cities, although it does not seem as if property prices are significantly above fundamentals for the country as a whole.” On the other hand, Joseph Stiglitz has a different view when he comments on the Fed’s current quantitative easing at wallstreet journal online (23rd October). He says that via pumping cheap money into the US-system money is supposed to reignite the American economy but instead goes around the world looking for economies that actually seem to be functioning well and wreaking havoc there.”

I do not agree with the rather harmless picture of the Chinese property market that was drawn by the IMF.

As Joseph Stiglitz accurately mentions, investors are using this cheap money for investments around the world. China’s property prices have been rising for years and are now showing first signs of a slowdown in prices. Nonetheless, there is the possibility of a new wave of demand in the Chinese market – due to the new liquidity. Moreover, investors do not entirely decide rationally but are always emotionally driven as well. Thus, this new flood of cheap money could be used for accumulating money on markets where volatility is higher which implies a higher chance to receive a promising NPV. Last but not least, China’s growth is still of unique proportions. Although China grew less in the third quarter of 2010 (+9.6%) and although Chinese central rates were now increased (+0,25%), both changes are only very small and lots of investors might still perceive China to be growing considerably, thereby increasing wealth and demand among Chinese taxpayers further.

Let us think about what would happen to several economies if China’s market for properties indeed exploded…Our worlds is connected so deeply with China that I believe every economy might be hit hard by such an event.
What do you think?

Kizzel_Keller

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5 Responses to All eyes on China’s property bubble

  1. rudi2020 says:

    I so agree with your post. Property market in China is pure nightmare for buyer. Prices per sq.m. have passed the border to insanity a long time ago. The amount of space and the prices are in no relation..

    This blog about reasons and implications goes even more into detail: http://tiny.cc/CHINA

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  3. vivipre says:

    The property price inflation is really a big issue China is facing. I agree with you that QE of the Fed definitely is a threat. Not only is the market full of cheap money but also investors don’t have a big choice of options to invest their renminbi.

    The influential short-seller Chanos is expecting China’s economy to “implode in a spectacular real estate bust”, CNNMoney.com reports.

    Check out this interview in which he is given more details about the Chinese property bubble and its potential impacts, also on the world market.

    http://money.cnn.com/video/news/2010/11/12/n_jim_chanos_china.fortune

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  5. stuerzele says:

    Very nice topic you worked on there. I was just thinking about it and checked on any news on this issue. During my research I found this article on real estate channel, predicting that the real estate bubble will burst soon, although they believe it might not be as bad as the burst of the real estate bubble in the US due to different buying behaviour of the Chinese.

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