China’s real estate bubble
According to George Soros, the Chinese property and construction bubble could grow and feed itself like in the United States in 2005–06. The bubble will keep growing until it becomes so large that it’s unsustainable. He also pointed out that monetary stimulus can extend the timeframe, but ultimately, the bubble has to burst. As we discussed in the previous part of this series, China’s recent economic growth was in line with expectations. It was mostly driven by stimulus measures.
Soros also pointed out that last ten years of the credit cycle required more credit to sustain growth in the US economy (VOO)(IVV)(IWM). He thinks this is happening now in China. The image above shows the credit cycle’s phases—the expansion and contraction of people’s access to credit. Central banks (KBE)(XLF) play a key role in this process.
During the expansion phase, banks give consumers loans, which improves business. Slowly, the credit spreads widen, more borrowers get access to loans, and credit increases. This process not only improves business conditions but also creates an asset bubble of high credit. When this bubble bursts, economic risk increases, defaulters increase, and credit starts to contract. Soros points out that this Chinese real estate bubble will burst sooner or later, fueled by credit growth.
Recently, the China Banking Regulatory Commission said that Shanghai banks couldn’t cooperate with six mortgage brokers for a month, as punishment for violating lending policies, according to a report published by Forbes. These violations could correlate with the excessive pressure on real estate industries to monetize blocked investments.
In the next part of this series, we’ll analyze Qu Hongbin’s, an economist at HSBC Holdings (HSBC), current stance on the Chinese economy.