China’s Housing Bubble

Writing at East Asia Forum, Tokyo University’s Takatoshi Ito argues that China’s housing bubble is worse than what’s being let on and that the measures Chinese authorities are taking will not be adequate for a soft landing. In particular, he traces China’s resistance to allowing the yuan to appreciate to a misreading by Chinese authorities of Japan’s “lost decade”:

Many Chinese officials tell us that they believe the origin of Japan’s stagnation for the 20 years after its [1980s] housing bubble burst lies in its failure to stand up to US pressure for the yen to appreciate . . .

The Chinese authorities are doing better than their Japanese counterparts in the 1980s. The central bank is tightening regulation of loan-to-value ratios and trying to end easy credit. But they are hesitating to take up the best policy — interest rate hikes and appreciation of the Chinese renminbi. The property bubble is a clear sign of overheating.

A Chinese housing bubble crash strikes me as a potential tipping point in the current phase of globalized markets. Walter Russell Mead described the current atmosphere by citing a verse from a Baudelaire sonnet, Les Hiboux:

It’s hard to capture the sense of massed, impending menace in translation:

Sheltered beneath the black yews,
The owls sit in rows,
Like strange gods,
Red eyes darting, they meditate.

This, I fear, is what our financial markets are up to these days. We spend and make happy plans; they wait ranged in rows in the black yews, red eyes alert, watching, thinking.

The same mood characterizes Europe, where no matter how often we hear that “nobody will be allowed to drown,” the power of predatory capital seems far more determinant than the defensive measures that can be deployed by states, the EU or the IMF.

The odd thing is that, in isolation, I’m not that worried about the Greek debt crisis, considering the fact that little over a year ago, I seriously wondered whether the global financial crisis would rend the EU in an East-West split. But it’s the potential pile-up of European contagion and Asian meltdown, all under the malevolent watch of those market owls, that seems worrying now.