Recent price increases in the property market have aroused fears that the �old� subprime bubble may have shifted to emerging Asia, with China being the first in line. Prices of new residential property rising at an annualized rate of more than 20 per cent (Mint, January 22nd) and residential pre-sales (sales of uncompleted houses) have increased by 147 per cent in the first half of 2009 compared to the same period last year.
Capital flows are heading towards emerging Asian economies where the recovery is strongest, driven by the combination of unprecedentedly low interest rates in advanced countries and renewed investors� appetite for risk. The resulting abundant liquidity is perceived as a source of threat for it may contribute to the creation of a new asset bubble. As a result, the IMF has recently decided to control capital flows to the region as temporary palliative treatment.
According to the Economist (January 14th), if a bubble does build up again, it will be in the emerging world where its symptoms are most likely to emerge: rapid credit growth, high asset valuation, and public enthusiasm for particular assets. To date, China seems to be the country where these three conditions are closest to being fulfilled.
New loan issuance is estimated to have doubled between 2008 and 2009, reaching a record 9.6 trillion yuan last year. The recent acceleration of credit growth, with an estimated 1.1 trillion yuan worth of additional loans in the first two weeks of January, has prompted the People�s Bank of China to raise banks� deposit reserve requirements by 0.5 per cent last week. The bank has also sought to reassure markets on the pace of credit growth by requiring domestic banks to lend in �a reasonable and balanced manner� in 2010.
James Hamilton (Econbrowser) explains that domestic inflationary pressures stemming from the country�s artificially undervalued exchange rate, rather than materializing in the goods and services sector, have tended to be channeled into the �hard� commodity and real estate markets with private investors stockpiling copper as store of value or acquiring property in major cities. Besides, with deposit interest rates at only 35 basis points, private investors have greater incentives to look into the equity and real estate markets for higher returns.
In advanced economies, excessive indebtedness and higher down-payments demanded by real estate lenders make opportunities for leverage in property markets in the region rather slack. In China, on the contrary, the government�s reversal of its past tight housing policies (implemented to deflate an impending bubble in the property market in 2007) in response to the financial crisis, coupled with loose lending conditions have revived such opportunities in the country. The reduction of minimum capital requirements for housing developments from 35 to 20 per cent in September 2008 and the 1.5 trillion yuan (38 per cent) from the fiscal stimulus package allocated to infrastructure have largely encouraged construction activity. Over the past year, buyers and developers, who had delayed purchasing in 2008, have rushed to take advantage of price drops and relaxed policies.
As for investors� appetite, the persisting accommodative stance of monetary policy together with high public indebtedness in advanced economies, with deficits exceeding 10 percent of GDP in some countries (such as the United States, Britain and Greece), may likely lead to a saturation in the demand for government debt securities in the region. Besides, the vast differential in the prospective growth rates of advanced and emerging Asian countries (the IMF forecasts 2 per cent growth in 2010 in the former compared to 8.4 per cent in the latter and up to 10 per cent in China) adds weight to the statement that the enthusiasm for (speculative) investment has greater chances of finding a new anchor in the emerging world, China in the lead.