China Banking Regulatory Commission Chairman Guo Shuqing said on March 2 that the current tendency of financialization and bubbling of real estate is very dangerous and is the biggest “gray rhinoceros” in the financial system. Since the second half of last year, China’s real estate regulatory policy has been full of different kinds of policies, such as “one city, one policy”, “three red lines” introduced by the central bank, “real estate loan concentration management” and so on. and so on.
Is China’s housing bubble already on the verge of bursting? How can we implement “no speculation in housing”?
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC), declared at a press conference on Tuesday that “the core problem in the real estate sector is still a relatively large bubble, with a strong tendency to financialize the bubble, which is the biggest gray rhinoceros in the financial system, and many people buy houses not for living, but for investment and speculation, which is very dangerous… …”
According to Guo Shuqing, Home buyers will have a lot to lose and banks will not be able to recover the principal and interest on their home loans after a sharp drop in China’s housing prices, which could threaten the domestic financial sector and macro economy.
Average new home prices in seventy major Chinese cities rose 0.3 percent in January this year, the largest year-over-year increase since September last year.
Zheng Xuguang, a U.S.-based economist and equity investment manager, told the station that the Chinese Communist Party authorities are full of anxiety as they watch the gray rhinoceros get fatter and fatter, but don’t dare to pull the trigger by liberalizing land supply and curbing monetary Inflation, “It’s useless to rely on Guo Shuqing to remind us that almost no one can change the situation in the north (where housing prices) are forever rising. Interest groups have no incentive to suppress inflation, which allows people close to power and hot money to get the benefits; and not to increase the supply of land, basically just talk.”
Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission (Public Domain)
China’s property market indicators exceed the 2008 financial crisis
Since the second half of 2020, Guo Shuqing has repeatedly and publicly warned of financial risks in the real estate sector. In his article “Improving the Modern Financial Regulatory System,” he stated bluntly that of the more than 130 financial crises in the world since the last century, more than 100 have been related to real estate.
“Before the subprime crisis in 2008, U.S. real estate mortgages exceeded 32 percent of GDP that year, while real estate-related loans in China now account for 39 percent of banking sector loans, of which there are also a large number of bonds, equity, trusts and other funds that are constantly entering the real estate industry.” Guo Shuqing wrote.
To measure the degree of real estate bubbling, indicators such as the house price to income ratio, the market value of real estate as a share of GDP and the real estate leverage ratio are also usually considered. Huang Dazhi, a senior researcher at the Suning Institute of Finance, wrote an analysis on the subject, saying that China’s housing market value has reached 356 percent of GDP in 2018, much higher than the 126 percent of the United States and 208 percent of Japan.
China’s real estate loan-to-GDP ratio (real estate leverage) grew from 15.9% to 40.1% at the end of 2010-2020, which has also surpassed the level of real estate leverage in the U.S. before the subprime mortgage crisis.
Guo Shuqing worries about the bursting of foreign financial asset bubbles
China remains the world’s largest inflow of foreign direct investment (FDI), attracting $163 billion in inflows last year, after several countries decided to adopt aggressive fiscal policy and accommodative monetary policy since the outbreak of the new crown Epidemic.
Guo Shuqing warned on the 2nd that the global financial markets are moving in a way that runs seriously counter to the real economy and that asset bubbles could burst.
Zheng Xuguang said that the U.S. government’s bailout funds and tighter scrutiny of the supply chain may increase China’s domestic dollar investment and financial risks, “If the surplus and foreign investment keeps increasing, the dollar keeps entering China to bring high yuan inflation, a windy situation, such as supply chain problems, speculative dollar followed, the yuan may appear in the short term Deflation. Many people speculate in real estate and it’s too late to turn around.”
China’s property market indicators exceeded the 2008 financial crisis (AFP file photo)
Many places have stepped up their property market controls, and three orders have been given to “not speculate on housing”
Guo Shuqing also noted at the conference that the Chinese government is determined to curb the real estate bubble, and that the growth rate of real estate loans in 2020 will be lower than the growth rate of other loans for the first Time in eight years.
Chinese Vice Minister of Housing and Urban-rural Development Ni Hong recently stressed the need to unswervingly adhere to the principle that “houses are for living, not for speculation”.
The local government has been moved by the wind, Shanghai issued measures again on the 3rd to strengthen the supply management of residential land and deepen and improve the linkage mechanism of house price and land price; Hangzhou also notified the requirements to prevent the irregular flow of business loans and consumer loans into real estate, and strengthen the judicial auction housing purchase restrictions. Shenzhen also introduced a guide price for housing prices, which has already caused a significant decline in housing transactions.
Xie Tian, a professor at the Aiken School of Business at South Carolina State University, said in response, “It is impossible to insist that housing is not speculative, and investment in real estate is normal behavior. In fact, the key lies in removing the monopoly of state-owned enterprises and central enterprises on the real estate market; more critically, in truly returning land to the Chinese people.”
“Just like the Russian fable, five swans pulling a cart from five directions do not change anything about the direction of the cart.” Zheng Xuguang believes that local governments cannot control the fuse of restless house prices without liberalizing land supply, “The financial crisis Guo Shuqing said may emerge sooner or later and will also lead to a crisis of CCP rule. Ren said that as long as the Chinese Communist Party does not fall, a real estate crisis will not break out. Objectively the logic of what the two said is also consistent.”