/ Dissecting China’s Housing Market
June 16, 2010    Disclosures    POSTED IN  EconomyMarketsInternational
The Wall Street Journal has put together a straight forward four minute video that outlines how bank lending in China operates and illustrates why some fear the rapid increase in lending might be creating a bubble in real estate.

Despite China’s efforts to transition from a pure command oriented communist economy to a quasi-capitalistic system the banking industry still remains primarily owned by the state. The country’s national leaders direct how much credit the banks can extend. While this may give national political leaders tighter control over the flow of credit compared to a capitalist country, at a local level politicians will continue to try and convince national figures to increase lending to their district in order to develop the local economy even if it is not necessary.

Over the past twenty years the massive migration from the rural west to the urban east and industrial growth have both contributed to the rapid development of China’s economy. This boom in China’s economy has allowed for a degree of upward financial mobility for those moving to the city. This was previously not possible in the closed communist country. With this massive flow of people China cannot easily afford a recession that could reverse the integration of the rural and urban populace. Chinese national figures might therefore be tempted to keep the credit spigot open too long in an effort to continue to expand the economy and develop a middle classs.

The extension of additional credit in China has at some level has contributed to the rapid increase in domestic economic growth, however if credit is not used for a productive purpose it can lead to speculation. It remains to be seen whether or not the massive residential real estate build out in China has moved beyond legitimate demand and crossed over into the realm of speculation.
Further Reading: Ezra Klein of the Washington Post interview’s Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China, in an article titlted, “Is China a housing bubble?
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