Over the past year, we have watched the Chinese government attempt to check real estate development in the country in order to try and stop the expansion of a real estate bubble in that corner of the world. In fact, lenders have been prohibited to lending to real estate developers in most cases, and many analysts have determined that aggressive government involvement in the market may have actually stalled the growth of the bubble. However, despite difficulty getting funding, China’s real estate developers are 41 percent deeper in debt than they were last year; their profits are falling and their properties are not selling[1]. While much of this – other than the debt itself – is the result of government intervention, the situation is still volatile and China faces not only a debt crisis on the part of its land developers but also rising inflation.
Interestingly, many analysts in China do not view the bubble as a particular problem. “China is not one big unified market,” explains Frederick Jiang, an asset fund manager, adding that he’s “not scared at all” about a real estate bubble” and thinks that the bubble will grow even bigger in destination cities in the country because of all the money being created right now. Families want to move to places like Shanghai, Beijing and Hong Kong, considered the “best cities” with the best schools, hospitals, services and nightlife[2]. Furthermore, points out Jiang, Chinese borrowers tend to put down 30 percent or more on a first property, and “leverage is next to nothing.” Of course, he admits, “if asset prices collapse even by just 15 percent,” the developers and lenders who loaned them money could go bankrupt.
Do you think that China’s real estate market and economy are in jeopardy? Does it matter?
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[1] http://www.marketwatch.com/story/chinas-real-estate-developers-struggle-with-debt-2011-05-09?reflink=MW_news_stmp
[2] http://blogs.forbes.com/kenrapoza/2011/05/08/afraid-of-china-real-estate-bubble/
This is a very interesting article. How could a Chinese property deflation impact the US? Not being an economist I can only follow logic.
What do people do who have cash deposits/investments when they face a financial squeeze? They tap those resources of course. In the case of China it could mean selling or cashing in the debt they bought from the US. In the very least it would mean that China would drastically reduce if not totally abstain from future US debt purchases. Without buyers for our debt our government expenses would abruptly be cut for us. We can’t continue to issue debt and then print money to buy it back. That is called Fraud on Main Street and the whole world knows it.
You must understand that there is no property tax due to the majority of the land in the cities listed above was purchased from the government at prices that make the the wealthiest people cringe. Their “bubble” cannot be compaired to the U.S.. Almost all of the people in those cities have a net worth greater than about 90% of Americans. We are in debt, they are not! Financial institutions created our bubble and the financial institutions stuck a pin in it! Stop buying on credit America!!!! A mortgage is justified, anything else is NOT!!!