China bubble beginning to pop

Last Updated on Friday, 15 April 2011 22:12 Friday, 15 April 2011 21:55

By: fanatic

Two sets of data released from China could signal the start of the explosion of the economic bubble. The price of new homes in Bejing fell by 26.7 per cent in the month of March according to the city's Housing and Urban-Rural Development Commission. The National Bureau of Statistics meanwhile reported inflation surged to 5.4 per cent year on year (the highest in 32 months) and the economy grew by 9.7 per cent during the first quarter of the year.

First quarter growth was down slightly on the 9.8 per cent recorded in the fourth quarter but still faster than expected. Growth last year was 10.3 per cent.

China also recorded its first quarterly trade deficit in over six years.

The Government has raised interest rates four times since October and increased the reserves banks must hold in an effort to contain inflation. China has also introduced limits on the number of house purchases in the property market with sales down 50 per cent year on year and 41.5 per cent month on month. In that respect, the policies seem to be half-working. Property prices are down but inflation continues to steam ahead.

In America, it was the property market that first crashed, prior to the general banking collapse. Recession then hit main street. The same was true in Ireland and Spain. First the property markets went south even though inflation and consumer spending were still powering ahead. It was only after property prices began falling that the general economy followed. Once property prices fell, consumers stopped spending as they generally felt 'poorer', as consumers stopped spending companies went bust, as companies went bust mortgage arrears began to mount until the credit crisis erupted due to dodgy mortgage backed securities sold by banks.

Could the bubble in China be on the verge of exploding?

The next few sets of economic statistics and property surveys will be crucial. A 26.7 per cent drop in house prices is not so much a cooling off but a collapse. If anything, China's policy of only allowing a limited number of house purchases should serve to increase property prices as purchasers compete for fewer houses. Yet the prices have fallen by over a quarter in the month alone.

With inflation rising and all attempts to control it so far failing, the rural areas in particular will be hardest hit with the soaring cost of food stuffs (+11.7%). Unrest could result if food continues to climb and authorities have instructed businesses not to increase prices any further.

China's economic actions are far in excess of what other governments have done to calm their economies. Limiting the number of house purchases and instructing businesses not to increase prices are pretty drastic measures to take in anybody's handbook.

Could the regime be worried a bubble bursting could lead to social unrest? There has been a renewed vigor in cracking down on religions and political parties over the last few months and China has a history of social unrest when inflation gets out of control. This plunge in housing prices and the continuing runaway inflation rate could mark the beginning of the latest economic crash to hit the world stage.