BizViews

Ignore threat of bubbles at your peril

By Xin Zhiming (China Daily)
Updated: 2010-03-16 11:24

Four or five years ago, unstoppable residential housing prices prompted some economists to warn that the industry had hijacked the national economy.

Sadly, they have been proven correct.

It is sad certainly not only for those who cannot afford housing, but also for national policymakers, who are supposed to regulate the sector.

I would contend that the ever-surging home prices - rising much faster than the officially released 1.5 percent annual growth - have made policymakers very cautious about deflating bubbles.

During the recently concluded "two sessions", the annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference, many participants raised the issue of rising home prices, but few officials went farther than the previous policy stance. There are no signs of further tightening in this controversial sector.

Some economists - far fewer in number than those who advocate supporting real estate expansion to increase GDP - argued years ago that real estate developers relied mostly on borrowed funds from banks for their development while banks also lend to home buyers. Once home prices drop, developers and home buyers may default on loans, thus leading to financial instability.

They were proven to have good foresight during the global financial crisis. The crisis may have saved the developers, who had almost been pushed to the wall as the central government tightened policies to prevent economic overheating and curb soaring home prices in 2007. In the financial crisis starting in 2008, the sector proved to be the most convenient and effective one for the government to use to boost GDP growth as soon as possible.

The sector is said to be able to boost sales in more than 60 others. In times of market growth, it could exacerbate overheating, but in times of recession, it could unleash huge purchasing power. This may be the easy way out, but it may not be the best one in the long term.

Home prices have generally been much higher than non-investor consumers can afford. Even investors, based on anecdotal evidence, have already paused to weigh the growing risks.

Few could deny now that there are bubbles in the sector. What they are not sure about is when they could burst. Nor are policymakers. From the message they have sent recently - from the Central Economic Work Conference in December, to the "two sessions", is that they want to maintain the status quo, with prices not going up nor going down too much.

The history of the capital market shows, however, that once bubbles begin to form, it's hard to control them; instead, they tend to inflate continually before bursting.

If that law applies to the Chinese market, the economy will become less gloomy.

But if it does apply, the economy will encounter disastrous setbacks in the future.

The author is a senior business correspondent of China Daily.