Chinese Housing Bubble: Another 2008 on the Way?

An official claims that housing problems are worse than those that hit the U.S.

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Could China be in for a sharp shock? Recent press on the nascent giant hasn't been good: attacks on school children have raised concerns about social and demographic tension, while some question the sustainability of China's export-led growth. Now, experts within China are warning of a housing bubble potentially far worse than the one the U.S. experienced prior to the 2008 financial crisis. This news comes along with worrisome larger economic numbers for the month of May. Could China be teetering on the same precipice other countries faced two years ago?

  • China Housing Bubble Bigger than U.S. or UK Version  In an interview with the Financial Times, Li Daokui, on the Chinese central bank's monetary policy committee, calls the Chinese "housing market problem ... much more fundamental, much bigger" than the pre-financial crisis issues in other countries. "China is running the risk or is on the verge of overheating," he says, and the problem goes beyond the bubble itself. He argues for, as FT's Geoff Dyer summarizes, "a gradual appreciation in the currency."
  • Translation: Social Problems a Factor, Too, offers Laura Mortkowitz at The Big Money. "One reason why the housing troubles in China have the potential to be worse than what the United States faced before the financial crisis is that China faces social discontent." Or, as Business Insider's Joe Weisenthal puts it, "high prices cause their own societal problems."
  • This May Lead to Action "Many observers had assumed that China would not raise rates," explains finance blogger Yves Smith at Naked Capitalism. "But the interview makes clear that rising social pressures are leading the government to try to take the air out of the housing bubble. The government appears to be starting with measures like tax measures that affect real estate only."
  • Concerns About Growth Joe Weisenthal, commenting on the FT interview with Li Daokui, also notes that Chinese prime minister Wen Jiabao is meanwhile sending his own message: "Dear countries that import our products, don't start slowing down." But other commentators and analysts, such as Daily Finance's Lauren Cooper, point out that there are signs of a slowdown, "at least according to the Purchasing Managers' Index numbers released today by the China Federation of Logistics and Purchasing. The figures indicate that the increase in factory output, the rate of hiring and new orders declined in May ... The numbers may indicate that there is less demand for products both at home and abroad." At 24/7 Wall St., Douglas McIntyre observes that the crisis in Europe "may hasten the slowdown and even drive China industrial expansion to a halt."
  • Which Could in Turn Lead to Inaction, suggests Weisenthal's Business Insider colleague Vincent Fernando. "Lack of clarity, plus recent Chinese concerns in regards to global growth threats, makes significant further tightening efforts less likely in the near-term."
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