Last Updated : 20 February 2013 at 15:40 IST
The Chinese property market bubble is about to pop; in the sense that it has been in an about-to-pop state for the past 5 years at least. Economists like Paul Krugman with a Nobel Price to his chest predicted that the bubble would pop in 2011 sometime in 2011 itself.
And Yangtze is still undulating with nil whirlpools.
“There is a property market bubble in China” said VK. Vijayakumar, Investment Strategist with Geojit BNP Paribas, Kerala, South India.
“The property markets there are inflated, speculation is rife and given low interest rates the banking system is exposed (to risks)”, he added.
Meanwhile, business is booming in China’s real estate markets, especially in Beijing.
"We have got off to a flying start in 2013. Transactions are picking up, so are prices," said Zhang Huanhuan, a saleswoman for Maitian Real Estate in the capital to South China Morning Post.
Prices of new homes in 70 major cities jumped 0.3% in November, the most in 19 months.
Meanwhile, the authorities there are likely to allow this bubble to float a little more even as they may try to attach strings to it making it a hot air balloon, given that a political transition in China is in the offing in March.
Unless there is stability and there exists no perception of growth, the Xi Jinping takeover may have to face challenges because popular upheavals cannot be ruled out in a stalled economy.
One advantage of property price rise is that it radiates a feel-good-factor across the economy. And a felt-good populace is necessary for stable governance, especially when the government is authoritarian. And it is acutely necessary when a transition is in the offing.
Property bubble and commodities
As and when the bubble pops, it would result in deflation, demand destruction and all and sundry financial indicators going sour ultimately ushering in a recession.
“Commodity prices can come down drastically when that happens…” cautioned Vijayakumar.
But that popping of bubble is not going to result in a financial contagion.
The foundations of Chinese financial architecture rest solely on Beijing. Unlike US, the system is not wired to other institutions of other nations.
Given the size of US economy, and its macro economic underpinnings, a repeat of 2008 may not occur; nonetheless, it would heavily impact commodity markets as China is one of the biggest consumers of commodities.
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