China's Bid to Tame Economy Begins a Real Estate Bust
Thursday, October 18, 2007
SHENZHEN, China -- Sweating in the bright afternoon sun, the men and women stand on the sides of the roads like homeless people clutching wrinkled cardboard signs. Waving the boards, the real estate agents call out to cars zooming by.
"Come take a look."
"You're welcome to visit."
Surrounding the agents in this upscale neighborhood are vast swaths of empty apartments that just a few months ago were selling at record high prices.
The housing market in this city of 14 million adjacent to Hong Kong is among the first casualties of China's efforts to cool an economy it fears may be overheating.
Faced with surging inflation, shaky loans and a stock market bubble that has grown more than 400 percent in just two years, the Chinese government in recent months has been pulling all policy levers at its disposal to control growth.
China's central bank has raised interest rates five times this year and upped reserve requirements for commercial lenders eight times. Last month, the central planning agency imposed a price freeze on cooking oil, electricity, water and other household essentials to try to stem inflation that is at an 11-year high. Securities regulators in at least one province have issued new rules banning high school and college students from buying shares to rein in speculative stock market investments.
"What China is doing nowadays can be described as crossing a river by fumbling for stones. . . . The Chinese government is in fact fumbling for the right path for Chinese economic development," said Huo Deming, an economics professor at Peking University.
The tightening measures are alarming some economists who worry that if China slams on the brakes too fast by using communist controls on what is increasingly a capitalist economy, there could be devastating consequences extending far beyond the real estate market in Shenzhen.
But others contend that to fix imbalances -- such as the growing trade surplus and shrinking private consumption as a percentage of GDP -- that echo the problems in pre-bust Japan in the 1980s, China needs to be doing even more.
"Tinkering at the edges" is how CLSA chief economist Jim Walker describes what China has done so far. Walker, who has long been warning about weaknesses in the Chinese economy, predicts that efforts to control inflation will ultimately fail next year and the country's double-digit growth in GDP will screech to just 5 percent. "They are walking straight into the Japan problem," he said.