China Power

Property Bubble Bursting?

Will a slowdown in exports tempt China to ease monetary policy? And what would it do to property prices?

I recently met with several economists who were discussing the ongoing euro zone debt crisis. When they mentioned debt, they naturally linked the discussion to what many are describing as China’s property bubble.

Europe is the largest single market for Chinese exports, and the crisis in Greece and Italy will naturally put pressure on China’s economy. Indeed, figures released today already show China’s exports rising at their slowest pace in two years. To protect growth and prevent a hard landing, China may consider easing monetary policy, a move that would risk exacerbating the property bubble that the government has busily been trying to deflate.

Such concerns aren’t unfounded. I remember during the global financial crisis of 2008 receiving half a dozen marketing text messages a day. I sometimes even received cold calls from sales agents. At the time, China’s property market was still depressed, with properties within a six to seven kilometer radius of the Forbidden City being priced at as little as 10,000 yuan ($1,580) per square meter.

As economic conditions became increasingly gloomy, Premier Wen Jiabao proposed a four trillion yuan stimulus plan, which in turn caused property prices to surge. Over the next two years, the prices of some properties increased several fold.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

With prices rising quickly, the government imposed various restrictive measures to cool China’s property market. Bank capital reserve requirements have been raised multiple times to discourage lending, while strict rules have been put in place on private purchases of third properties, to discourage speculators. Banks, meanwhile, have raised interest rates on loans, making it harder for members of the public to access cash for purchases.

And now, my phone is once again ringing with sellers highlighting the falls in property prices. Is the Chinese real estate bubble bursting? Could falling property prices and a possible slowing of European demand prompt the Chinese government to ease monetary policy once more? And would this spark another property boom just as prices look to be falling in some areas?

The government would be advised to wait and see what happens next.