Thursday, April 15, 2010

China's Real Estate Bubble Could Cause Economic Crisis

Fears of a property bubble in China are still high despite efforts by China to cool the market. Economist Andy Xie thinks that appreciation of the Yuan could fuel that the property bubble and potentially lead to a major economic crisis. See the following post from The Mess That Greenspan Made.

The latest data from China shows that buyers have been undeterred by the many efforts undertaken by the government to cool the housing mania that continues to sweep the country. Property prices rose at a record pace last month and former Morgan Stanley analyst Andy Xie again sounds alarmist as detailed in this story at China Daily.
Andy Xie, a former Morgan Stanley chief Asian economist, asserts that China’s property market is the biggest bubble in the history of finance, and only by raising the interest rate can the bubble be pierced, says an article in China Times. Here is an excerpt:

Xie underlines that priority should be given to increasing interest rates rather than to appreciation of the renminbi. Revaluation of the renminbi alone would further exacerbate the property bubble and inflationary pressure, potentially causing a major economic crisis in the next two years.

Actually, Xie believes that growing expectation of the yuan’s appreciation in financial markets is the most important reason for China’s vast property bubble. Massive hot-money inflows would spark excessive liquidity and speculation, fueling China’s property bubble.

According to Xie, in a normal economy, currency appreciation cools inflation by decreasing import prices. However, China imports mainly raw materials, equipment, and components. A modest currency appreciation would do virtually nothing to curb inflation.
You have only to look back at what happened in Japan in the late-1980s to understand the danger here. The significant appreciation of the Japanese yen beginning with the 1985 Plaza Accord turned what was, up until then, a garden variety asset bubble into a record-setting asset bubble, one that their economy is still recovering from two decades later.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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