China Stops Bank Loans Near Peak of Bubbles
If you’re trying to lessen the effects of a bubble, it’s probably a better idea to stop it before it gets very far rather than throw a grenade at it when it’s already grown to the size of a small planet.
China’s Bubbly Prices
But at least the leadership in China has some cajones. Cognizant of the giant real estate and stock bubbles in China today, they’re still ready to pop them. Stock prices at the Shanghai and Shenzhen stock exchanges are still up about 500% over the last 2+ years after their recent pullbacks, and residential real estate up 300-1000% + in Shanghai since its lows at the turn of the 21st century (the place I rent in Pudong sold for a little over 1000 RMB/m2 seven to eight years ago and now goes for 15,000 RMB/m2).
With such gains and the mania accompanying them, it’s hard to argue that there is a bubble in China’s real estate and stock markets.
It’s only now, as prices in the stock market take a breather, and prices in some real estate markets in China start to fall (Shenzhen is one such place, according to a classmate of my gf who is working in a real estate office), that China decides to stop banks from making any new loans. Maybe they’re hoping to pop the bubbles before the Olympics? This lead from an article in today’s Wall Street Journal:
SHANGHAI — Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world’s third-largest economy.
In recent weeks, regulators have quietly ordered China’s commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.
Stopping Bank Loans Takes Cajones
Don’t get me wrong - this is a gutsy move by the Chinese government. Instead of trying to bailout insolvent banks after it’s obvious that they are insolvent (and I’m not calling Chinese banks insolvent), they are bringing on the pain now. One thing is for sure: with a cap on lending the bubbles can’t go much further. And that can only be a good thing for China in the long run.
Massive misallocations of resources always results in wasted money, a few winners, and a bunch of losers (along with a few unanticipated positives later down the line). Just wish I could have convinced my friend to NOT buy a tiny little apartment he just closed on… the news today may have shaken him.
What do you think about the current state of China’s stock and real estate bubbles? Is this halt in additional lending significant?
I think will see the market pick up again after Jan first. In addition to the freeze on loans that you have mention, their have been halts on various propert collateralized loans since august. Banks have an annual limit on how much lending they can do each year, and most banks in SZ were already touching their limit at the end of summer.
Hey Daniel,
Thanks for the extra information about collateralized loans. By market, do you mean lending market, housing market, or stock market (or all three)?