A Bubble in China

Stimulus Lending Fuels a Real Estate Bubble in China

The volume of lending by China's banks appears to be pumping up a real estate bubble that could have global repercussions. Time magazine reports buyers waiting on line to snap up new condos in Shanghai and Wuhan. According to the Financial Times, government figures show that "prices in 70 big and medium-sized Chinese cities rose 3.9% in October from a year earlier, accelerating from September’s 2.8%," and that "price rises in top-tier markets such as Beijing and Shanghai have been much faster."

Experts, including Wharton management professor Marshall W. Meyer, whose research focuses on Chinese business practices, say the price surge is a result of a bank lending spree under the government-led stimulus program in addition to policies such as tax breaks and smaller down-payment requirements. Does this sound familiar?

Just as the U.S. real estate bubble had global implications, so could China's, according to Meyer. "Real estate is as liquid as stocks are in China, and [the Chinese] have never experienced a downturn in real estate prices." That puts lots of pressure on the government to step in. Earlier this week, according to the FT, Fan Gang, a member of the central bank's monetary policy committee, said that real estate prices pose a growing risk of asset price bubbles. Says Meyer: "My concern is that any government intervention, even if it is measured and gradual, "will signal to the rest of the world that Chinese growth will not pull us out of the recession."

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"A Bubble in China" Knowledge@Wharton, [November 19, 2009].
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