Chinese Regulator Attempts to Calm Housing Bubble Before US Raises Interest Rates

Chinese Regulator Attempts to Calm Housing Bubble Before US Raises Interest Rates
Customers and real estate agents look at several building models at a real estate exhibition in Jiashan, in China's Zhejiang Province, in this undated photo. (AFP/AFP/Getty Images)
News Analysis

Following a recent warning from China’s top banking regulator about a possible bubble in the Chinese housing market, mainland Chinese media company ARCHINA published an editorial emphasizing the communist regime’s concerns and the need to enforce tighter regulations. The move comes after U.S. policymakers announced raising interest rates by the end of 2023.

According to official data, the relative property prices in Shenzhen, Beijing, Shanghai, and Hong Kong rank among some of the highest in the world, suggesting the boom could transform into a bubble.

Mike Sun, a senior investment consultant in North America, told The Epoch Times in an interview last month that the appreciating exchange rate of the yuan and China’s housing bubble indicate that China’s economy is in a financial crisis. He believes that Chinese authorities are rolling out measures to prevent the real estate bubble from bursting before the U.S. Fed policymakers raise interest rates to a possible 0.6 percent near the end of 2023, which was announced on the Federal Open Market Committee (FOMC) on June 16.

Chinese Regulator Wary About the Real Estate Market

On June 10, on a Shanghai financial forum, Shuqing Guo, chairman of the China Banking and Insurance Regulatory Commission, warned, “Those who speculate on foreign exchange, gold, and other commodities can hardly make a fortune, just like those betting that the housing prices will never fall—they will pay a heavy price in the end.”
Guo’s comments shook the financial market. On June 12, ARCHINA published a commentary on Guo’s statements, headlined “It is time for the real estate speculators to give up their fantasy.”

The article said Guo’s phrase “heavy price” suggests that the situation is serious, but his words indicate that the Chinese regulators are confident in controlling the housing prices. It also said that the era of real estate arbitrage is coming to an end. Despite financial regulations, hidden issues in China’s property market still exist. So strict rules, including requiring proof of source of funds, are necessary to slow down the real estate frenzy.

On Aug. 16 last year, Guo published an article on Qiushi, the Chinese Communist Party’s official theoretical journal, and wrote: “Unswervingly fight the battle to prevent and resolve financial risks. ... The real estate bubble is the biggest gray rhino that threatens the safety of the financial market.” The “gray rhino” refers to an imminent threat that follows a series of warnings that people have ignored.

China Attempts to Deflate the Bubble Before the Fed Raises Interest Rates

Investment consultant Mike Sun told The Epoch Times that he was not surprised by Guo’s warning about China’s real estate bubble. It is a potential consequence of the appreciation of the yuan and hot money flows into the mainland market, he said. Hot money is capital frequently exchanged by investors for short-term returns.
Regarding the currency appreciation, Sun pointed out that foreign capital would flow into the Chinese real estate market as investors speculate an appreciation in the yuan, hoping to earn the interest rate differential and the value of the yuan assets rise. Furthermore, as hot money flows into the property market, the real estate bubble could expand, which is the Chinese authority’s biggest concern. Hence, the authority tightly controls the source of funds for properties, fearing the hot money flowing into real estate.

Why is China so worried about its real estate bubbles? According to Sun, the leading cause of yuan appreciation is the weak U.S. dollar. Once the Fed applies contractionary monetary policy by raising interest rates, the dollar will appreciate. At that time, hot money will flow from global investors and many foreign direct investments (FDI) will leave China, weakening the Chinese economy and its financial stability. Thus the Chinese regime is applying strict measures to the housing market, namely restricting FDI.

Sun believes the current situation of China’s real estate market, yuan appreciation, and the influx of hot money resembles Japan’s situation before its real estate crisis during the 1980s. The Chinese authorities are aware of the current risk and future problems they may face.

On May 21, Zeping Ren, chief economist of Soochow Securities, published an article titled, “Past Events of Global Real Estate Bubbles: The Birth, Madness, Collapse, and Implications,” in which he analyzed five global real estate bubbles and concluded nine factors. At the very start, a bubble forms due to rising demand fueled by economic growth, urbanization, and increasing household income. Excess liquidity and meager interest rates that encourage spending further lead to increasing demand that causes the bubble to grow like a malignant tumor. Finally, the day comes when the bubble bursts. Several real estate bubble bursts were related to contractionary monetary policies that lead to less money circulating in the economy.

Ren refers to Japan’s Lost Decade in the article. In 1985, the Japanese economy boomed, and the yen appreciated significantly. From 1986 to 1990, with the stimulation of low-interest rates, excess liquidity, financial liberalization, and foreign capital inflow, a real estate bubble was born. At that time, the price of land in Tokyo alone matched all the U.S. lands’ worth. However, under the pressure of rising interest rates, regulation of real estate loans, and capital outflows, the real estate bubble burst. The price of real estate began its journey on a long downward spiral as Japan fell into the Lost Decade.

Ren also mentioned China’s rebounding real estate since 2008. Its housing market went through three rebound waves in 2009, 2012, and from 2014 to 2016. Apart from stimuli such as economic growth and rapid urbanization, other stimuli are currency devaluations (excess printing of money) and low-interest rates.

Qingyou Guan, the chief economist of the Economic Observer and executive president of Research Institute of Minsheng Security, published an article on Chinese news portal Sina on housing prices. The house price to income ratio indicates that the properties in Shenzhen, Beijing, and Shanghai are alarmingly high, with percentages of 57.97, 55.80, and 45.55. These cities exceed Hong Kong’s housing price to income ratio and are one of the most expensive places to buy real estate.

Guan also pointed out that one of the key indicators to check whether the boom is turning into a bubble is the real estate price to rental cost ratio. Because the expenses of properties significantly exceed the rents, investors are speculating a rise in prices, hence heating the market and leading to a potential bubble.

Shenzhen’s ratio has reached 82.15 percent, making it the highest in the world. Beijing and Shanghai rank fifth and sixth in the world respectively. Guan said that there are bubbles in the housing prices of these cities.

In conducting their research, Guan and his team used data from Numbeo, the world’s largest online collaborative database, and they also selected the world’s most representative cities as their sample.

Sun suggests that China has long been paying close attention to the Fed’s actions. Due to the situation of China’s real estate market, recent capital inflows, and currency appreciation, the authorities must keep an eye on the Fed’s actions to anticipate when the U.S. exchange rates will appreciate. As interest rates rise, hot money will flow to the United States, impacting China’s housing bubble. Hence China must attempt to calm down and deflate its real estate bubble before the Fed’s policies change.