The strength of China’s economic rebound following the initial GFC slump was a direct consequence of government policy, with the Chinese government encouraging growth through cutting interest rates and easy bank lending conditions. In this environment, bank lending in China accelerated dramatically coinciding with increased government spending to stimulate domestic activity which resulted in a massive expansion of the budget deficit. The objective of these policies – to stimulate domestic activity in place of deteriorating exports to trading partners – was achieved with GDP growth thriving in 2010, but as a result China now faced other challenges. Increasing urbanisation of the population had resulted in high demand for housing, this combined with easy credit conditions had seen house price inflation boom over the past two years. AMP Capital’s head of investment strategy and chief economist, Dr Shane Oliver, described this as a demographic driver, and the migration of large numbers of the Chinese population to city areas also demonstrated why some cities were seen to be somewhat overvalued. The MLC report said: “The aspiration of Chinese households to participate in the housing boom makes the Chinese housing market one of the stunning investment stories of the post- GFC environment and one of the potentially most dangerous.
“The risk of a housing bubble bursting in China at some stage in the future is very real. There is an equivalent risk in many other Asian economies which have seen similar housing price inflation since the GFC.” But while the risk may be very real, not everyone was panicking, with AXA Real Estate Investment Managers’ global head of Asia, Frank Khoo, trusting the ability of the Chinese Government to deflate the potential bubble without causing any major impact on the economy. “The government is trying to clamp down on this asset bubble,” Khoo said, explaining the government was doing so through tightening on the lending side, making it more difficult for banks to lend money and therefore making it more difficult to borrow. “What the government is trying to do is trying to correct this imbalance where there is too much liquidity,” he explained. “It’s trying to take liquidity out of the system by increasing the bank reserve ratio by making it much, much harder for people to buy if they don’t have cash.” Inflationary pressures had forced policy to shift to address the issue, meaning interest rates were starting to rise and currencies were starting to appreciate. MLC’s Karagianis said this would probably mean the available capital in the future would start to decline and some of the markets, including the China property market, that were being buoyed by very strong capital flows may start to suffer. “It’s often the way with bubbles. While you don’t necessarily get a sense of how inflated they are on the way up, when things turn and the capital starts to become a little harder to come by you often get disproportionate falls in those markets and that clearly than shows that there were bubble-like characteristics,” said Karagianis. As the correction was being driven by policy, rather than by demand, the Chinese Government would have the ability to adjust policy when needed to ensure a “healthy correction”.