Can China step off its property treadmill?

Danny, the political theorist, aspiring lawyer and purveyor of rare herbs in the British cult film Withnail and I, understood the problem of Chinese real estate. “If you’re hanging on to a rising balloon, you’re presented with a difficult decision,” he observes. “Let go before it’s too late or hang on and keep getting higher, posing the question: How long can you keep a grip on the rope?”
Several Chinese cities suspended land sales in recent days and weeks, after a revamped auction system failed to have the desired effect of restraining prices. It was the latest of Beijing’s periodic stop-start attempts to cool the housing market. This year, these have also included revived talk of introducing a recurrent property tax, a long-debated measure that has gained fresh impetus as President Xi Jinping places a priority on reducing inequality. Don’t expect these efforts to amount to much, at least in the short term.
More than a decade ago, the American hedge fund manager Jim Chanos said that China was on a “treadmill to hell” because of the economy’s dependence on real estate for growth. Chanos was wide of the mark in his prediction that the property bubble might burst as early as 2010. Yet in the intervening years, the imbalances have only grown more pronounced. While a collapse has been avoided, China is no closer to weaning itself off its real estate addiction. In fact, the dependency appears to have grown.
Despite Xi’s admonishment that “housing is for living in and not for speculation,” and the government’s regular entreaties to banks to scale back property lending and increase the flow of credit to small business, the share of funds directed to the industry has risen. Real estate loans have increased to more than 27% of total yuan advances, from less than 20% a decade ago, according to People’s Bank of China data. Moreover, this is certainly an understatement — at least according to the country’s head banking regulator, who ought to know. Guo Shuqing, chairman
of the China Banking and Insurance Regulatory Commission, wrote last year that the real share of property-related loans is
more like 39%, or $10.8 trillion.
Floating on top of this ocean of funds is a bubble of epic proportions, one that by various metrics easily overshadows the pre-global financial crisis run-up in US property values (which burst with such disastrous consequences) or the unsustainable booms in European countries such as Ireland and Spain. It stands comparison with the Japanese real estate bubble of the 1980s, which helped send the country into at least one “lost decade” when it finally burst in the early 1990s.
Two measures serve to illustrate how extended prices have become. In leading cities, prices relative to average incomes are orders of magnitude greater than in global metropolises such as London, New York or Sydney, where valuations are often viewed as unaffordable, according to Numbeo, a cost-of-living data collection website.
And rental yields are often less than half of what is available in those markets, despite China having relatively higher interest rates.

—Bloomberg