Housing bubble threatens economic recovery

By Yi Xianrong
0 CommentsPrintE-mail China.org.cn, September 1, 2009
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The economic situation will improve in the second half of 2009. Already in the first half of the year Germany, France, Japan and China all pulled out of the economic downturn that started in 2008. Though the economic trend cannot be described as bright, the worst days of the latter half of 2008 are over.

China will almost certainly achieve its target of 8 percent growth rate in 2009. But we need to examine carefully the quality of that economic growth. Should the government encourage investment or boost consumption? China's imports and exports are still declining and this trend will not be reversed before the world economic recovery, especially the US recovery, takes place.

China should focus its efforts on domestic demand as an engine of growth. But expanding domestic demand is not a simple matter. Everything depends on delivering real increases in incomes and that is not an easy task, especially in the case of farmers. On the other hand, if the stock market keeps going up in the second half, it will strengthen confidence in economic recovery and boost consumer spending.

As for prices, in the second half there is a possibility that the inflation rate will rise. Real estate developers will use this as an argument to dupe consumers into buying houses. But in fact it is likely that the inflation rate will remain under 2 percent for the second half year.

When large amounts of funds flow into asset markets, their first port of call is the stock market. China's stock indices have been rising at an unprecedented pace, doubling in the first half of this year. Share prices have been pushed up by a combination of the inflow of funds into the market and the economic recovery. It is likely the stock market will continue to rise through the second half of 2009.

But the most urgent economic problem is a potential housing bubble. Loans are flooding into the real estate market, and will certainly cause a surge in house prices. This in turn might become an obstacle to the economic recovery and stable growth in the second half of 2009. To understand how serious the problem is, we need only consider that in the four months from April to July 500 billion yuan of individual mortgage loans were approved. This compares with 713.7 billion yuan for the whole of 2007. If this trend is not reversed, a real estate bubble will develop. Once the bubble bursts, economic growth will be interrupted. We therefore need to pay close attention to the threat posed by the looming housing bubble.

The author, Yi Xianrong, is a researcher with the financial research center of the Chinese Academy of Social Sciences.

This blog was first published in Chinese on 8:17 a.m., September 1, and translated by Zhang Ming'ai


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