China Housing Market (Boom or Bust)

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Asset bubble main threat to China growth

Michael Sainsbury
From: The Australian
May 20, 2011 12:00AM

http://www.theaustralian.com.au/business/news/asset-bubble-main-threat-to-china-growth/story-e6frg90o-1226059244916

CHINA is capable of strong growth for another 30 years, but the re-mergence of a major asset bubble looms as the biggest short-term danger to its economy.

China's leaders have calmed the country's roaring property market as they try to slow growth and battle inflation, but economists, including Australia' new Treasury chief Martin Stephenson, have been warning about problems ahead for Australia biggest trading partner.

"If the government did nothing about it, if they allowed it to really bubble up, that is very dangerous," economist Fan Gang said on the sidelines of the Australian Institute of Company Directors conference in Beijing.

"Now, after two years it is stabilised, I would say. The hard landing is already avoided, but the danger is always there.

"It could bubble up in the next couple of years, given that there is a lot of money around.

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"If you look at the past 30 years, all the major crises in the world have been related to asset bubbles, particularly housing.

"The government takes this one on both sides - including the social side - so it's a big issue, very dangerous."

Dr Fan is an adviser to the People's Bank of China - the central bank - and heads a think tank, China National Economic Research Institute, and is secretary general of the China Reform Foundation. He is also a professor at Peking University and the China Academy of Social Sciences. His close links with the Chinese government have led to him being named several times in lists of the world's most influential people.

Dr Fan, who earned his PhD in economics at Harvard, said China could easily keep growing strongly for another 30 years, and downplayed fears that inflation would continue to be a major problem.

"It's not that serious compared to recent history," he said

"In 2007-08 it was 8.7 per cent, at its highest quarterly inflation, now it's at 5.4-5.3 per cent, so it's not that serious. Secondly, I do not see a very permanent problem with that.

"Last time, it was more permanent because of global food prices and China was in a peak of its cycle, so it had those two things together for 2 1/2years. Now inflation is much more diversified.

"I do not see a long-term factors like last time. Commodity prices are coming down and expectations of food prices are coming down, so you may have several months more but I don't think it will last too long."

He also backed Chinese government steps to counter inflation, which is seen as a particular threat because of the social instability it can unleash.

"Given global liquidity, and particularly the Chinese liquidity problem, it's quite serious what the Chinese central bank has done to wind back the liquidity, the reserve rate requirement is now 21 per cent."

Inflation may have peaked already, he said. "The second half will be better that the first half.

"Wages are increasing but in the agricultural sector the major problem is not wages - it was speculation, there is a wage increase but not that dramatic, not 50-70 per cent.

"Wages are an issue in the long run and a more general issue, but wage increases are partly because of inflation - an indexation process . . . so hopefully this round of wage adjusted can be calmed down as well when inflation is stabilised.

"CPI and asset inflation are going together, so people feel as though their money is losing value. You need to think about to these things together."

Dr Fan said another interest rate rise - widely tipped by China-watching economists - would be hard to justify.

"It is possible to have another interest rate hike, but given the current issues with the exchange rate and given that the US has still not moved on interest rates and the European Central Bank has only done a little, it is very difficult for the Chinese central bank to increase interest rates further.

"So the central bank relies mostly on the quantitative measure. If they do not do this, the banks have more money to lend and inflation will be higher, so it's effective.

"It does have an impact on the commercial banks' lending capacity, as well as central banks' bills and direct credit controls. On the other side, interest rates are not necessarily effective . . . some developers don't really care if interest rates go up 0.5 per cent.

"Quantitative policy is still the major part and it is difficult for another interest rate hike."

Still, some people, such as long-term China bear, hedge fund manager Jim Chanos, say efforts by Chinese authorities to cool its economy could go too far.