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Chinese Monetary Official: Housing Risk Greater Than in US, UK Pre-Crisis

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An interview with the Financial Times by Li Daokui, who serves on the Chinese central bank’s monetary policy committee, included an uncharacteristically candid comments on the state of China’s housing market and by implication, the direction of Chinese interest rate movements. From the Financial Times:

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”…

Mr Li said the high cost of housing could hamper future growth by slowing urbanisation. Rising prices were also a potential political flashpoint, especially among younger people who felt locked out of the property market.

“When prices go up, many people, especially young people, become very anxious,” he said. “It is a social problem.”

In spite of the sharp slowdown in property sales and the troubles in Europe, he said economic activity was still too strong. “China is running the risk or is on the verge of overheating,” he said. Although he added: “I would say the situation is not out of control.”

Yves here. Many observers had assumed that China would not raise rates. 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 (a plan to “reform” real estate taxes was announced Monday). But Li’s concern re overheating generally suggests that interest rate increases are far from off the table.

Update 12:30 AM: Reader purple pointed out that Li’s remarks seemed at odds with Wen Jinbao’s. Wen focused on the sovereign debt risk, and indicated that more, rather than less, stimulus was in order. From Reuters:

Striking a more optimistic note, China’s Wen said the world’s third-largest economy and its prime growth engine remained on course to meet its growth targets this year, though he added it would require Beijing to “maintain a certain level of intensity in its economic stimulus.”

Yves again. We’ve noted previously that analysts differ considerably in their estimates of Chinese inflation, and that any look at Chinese fiscal and monetary policy suggests meaningful inflation is a likely result:

The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

Even though the FT article on Li suggested a revaluation of the renminbi was a possible outcome, high domestic inflation would makes Chinese goods less competitive all on its own.

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13 comments

  1. bill

    i urge you to listen to the entire interview. the ft summary was poorly edited. li daokui is pretty clear that the more substantive risk is around social stability, which if true more likely means that the last thing the government will do is raise rates across the board anytime soon, especially considering that when it comes to mortgages the government already has raised interest rates 10% or more.

    li also makes very interest comments about a property tax (basically don’t expect anything meaningful anytime soon) and reform of the local government financing system

    li also told bloomberg a few weeks ago that “The property market will not see price falls of 20 to 30 percent because that could ‘could lead to new social problems‘ http://www.sinocism.com/archives/295

  2. MyLessThanPrimeBeef

    As China’s economy gets bigger, it won’t be long before the fate of the entire world is decided by a few men and women on the Poliburo in Beijing.

    That’ for later.

    Right now, with the high cost of housing, the Chinese people are anxious, especially the young.

    If they deflate the bubble, the worry is for social instability.

    Either way, they have a big problem.

  3. Abhishek

    Chinese real estate company bonds are already pricing in a bubble according to Bloomberg.The yields on these bonds have increased substantially in 2010.

  4. psychohistorian

    So how is it that when the US runs the printing presses as they have for the past almost two years to the tune of how many trillion and there is no hint of inflation but if China does it then there are inherent problems?

    This is a strange economic war where the various factions are trying to bring down each others economy.

    1. Beamer fan

      LOL

      and I was promised a big chinese riot by now too. nevermind that no riot warning was issued on Greece, or France gov. stability also can be toppled by rioting. Or US immigrant riot?

      So many funny predictions. And the best still think US will end up with japan lost decade. Ha ! Japan has huge export surplus and the yen is balance. US is going UK during Ike/suez crisis, argentina, or greece. It won’t even be vietnam stagflation/gold devaluation either. Margin call on US bond is coming in the near future.

      Then let’s see who is rioting.

  5. Jojo

    According to this article, China expects many people moving from rural to city environments over the next 15 years – so elevators are an investment idea. [lol]

    ===============

    Businessweek
    May 27, 2010

    China’s Elevators: Built for Serious Speed
    Competition for installations mounts as skyscrapers sprout
    By Jason Clenfield

    Frank Lloyd Wright predicted U.S. suburban sprawl when he said the shape of modern cities would be decided by the winner of a race between the car and the elevator. “Anyone who bets on the elevator is crazy,” he said.

    China may prove him wrong. Some 350 million Chinese–more than today’s entire U.S. population–will move to China’s cities in the next decade and half, according to McKinsey, and government measures to limit sprawl and protect farmland mean developers have to build up rather than out. McKinsey estimates that as many as 50,000 skyscrapers will be built in China over the next 15 years, the equivalent of 10 Manhattans.

    The prospect of that building bonanza has manufacturers racing for a piece of an $11.7 billion annual Chinese elevator market that researcher Freedonia Group predicts will more than double within eight years.

    The bottom line: As China builds up, not out, demand will swell for fast elevators.

    http://www.businessweek.com/magazine/content/10_23/b4181018613201.htm

  6. pros

    The young, highly educated Chinese I know are quite disillusioned:
    they say the second generation of the public officials have become wealthy from the corruption but that everyone else is screwed

  7. Dirk

    In a country that is growing real GDP at 11% or more, why is 12.8% year over year growth in housing prices considered prima facie evidence of a housing bubble. It is not like in the US durring the bubble where in Pheonix prices were up over 40% y/y at one point in the context of apx 3% real GDP growth, and all the room in the world to grow outwards.

  8. Brad Gardner

    I think its a mistake to pay too much attention to interest rates in the case of China. Interest rates would have to go up over 20% if they were to meet the rates being given in grey market banks, the effect of any interest rate hike in is largely to increase deposits, which if I remember right is exactly what we don’t want from the country.

    The big problem is lending quotas, which it seems their cracking down on. Though I do think its fairly clear that most of that money is going into property.

    http://chinesebox.typepad.com/chinesebox/2010/05/how-chi

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