Less than two weeks after a leading Chinese academic suggested that China’s central bank should signal its commitment to a stable monetary policy so as to help prevent the development of possible asset bubbles, a Chinese regulator expressed concern about increasing indications of overheated bank lending to the real estate sector.
On Sunday, CNBC reported:
China's top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market.
"(We) must control the risk of real estate loans," said Liu Mingkang, the head of the China Banking Regulatory Commission, adding that measures must be taken to better evaluate the creditworthiness of borrowers.
The growing concern in China about the potential risk of a possible real estate bubble, probably one or more regional bubbles, is well-founded.
• Banking crises have often been preceded by credit booms. An IMF Working Paper written by Luc Laeven ad Fabian Valencia found that credit booms preceded about 30% of banking crises.
• Real estate busts in which the prices of homes, farms, and/or commercial property fell have often led to waves of bank failures.
• Research has shown that shifts in capital flows from earlier asset bubbles can contribute to the rise of asset bubbles elsewhere. Hence, with the U.S. housing bubble having burst in recent years, some capital in search of appreciation could flow to a growing economy and rapidly rising asset markets in China.
• According to research by the International Monetary Fund, housing busts typically lead to recessions that are twice as deep and twice as long as those associated with equities busts.
• Considering the still fragile shape of economies in parts of Asia, Europe, and the Americas, including financial system fragility in some of those locations, the rise and fall of a real estate bubble in China could send the kind of fresh shock rippling through the global financial system that could suffocate any economic recovery that might be underway in various Asian, European, and North and South American economies at that time. During the Great Depression, a relentless wave of economic shocks rolled across the European and American economies inhibiting any early recovery.
• Should an asset bubble burst in China, its fallout could sufficiently damage already-weak financial institutions in numerous major money centers so as to lead to a prolonged impairment of the credit creation process. Such a development would have the potential to lead to a prolonged period of regional or global economic stagnation.
• In China, a significant real estate bubble could undermine domestic economic growth and job creation. Those developments could lead to a further intensification of forces contributing to recent ethnic strife in parts of China.
All said, China has ample reason to be concerned about the possible rise of a major regional housing bubble or bubbles. Given the stakes involved, China might well choose to break new monetary policy ground in attempting to deploy monetary policy toward reducing the risk of the emergence of a real estate bubble.
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