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Why China Can’t Cool Its Overheated Real Estate Boom
(DAILY FINANCE) - Even among Western analysts who live and work in China, the major role played by municipal governments in fueling China’s increasingly speculative real estate boom is underappreciated. The actions of those local authorities are at the heart of China’s property bubble, and they explain why the central government’s attempts to cool lending and construction are failing.
China’s central government has attempted to douse the speculative flames of its real estate bubble — prices rose 9.5% in January alone — by calling on banks to curb real estate lending and by increasing the level of reserves banks must maintain. But those moves are offset by the incentives local governments have to put money into real estate speculation.
The key difference between China’s current real estate bubble and the U.S. bubble that popped in 2007 is this: In the U.S., it was individuals and lenders who made overleveraged, speculative bets via subprime mortgages. In China, explained Northwestern University researcher Victor Shih to NPR, the leveraged debt fueling the speculation comes from local governments, which have borrowed trillions of dollars worth of funds from China’s banking system to develop real estate projects in their jurisdictions.
Shih has found that almost 50% of the Shanghai government’s revenues come from land sales, and local governments have come to rely on this income.
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