China warns of stability risks from housing bubble

China lendSept10.pngChina’s leadership seems to be increasingly confident about its ability to redirect the economy towards more domestic consumption over time, and away from the previous over-reliance on exports.

As the above chart shows, bank lending (red column) is well on track to meet the $1.1trn target set for 2010, down 21% from 2009′s high. In turn, given the close historical correlation, this should mean that electricity consumption (blue line) starts to stabilise, along with industrial production.

This also explains the government’s reluctance to raise interest rates, even though inflation moved well above target to 3.5% in August. And it suggests premier Wen Jiabao was serious when warning last week that:

“It is the key responsibility of all levels of governments to stabilise housing prices and to guarantee housing availability. The issue is not only an economic problem but also an issue of people’s livelihood that affects social stability.”

With China Daily reporting that rising property prices are causing rents for small Beijing apartments to rise by up to $150/month, the risk to social stability is clearly rising. And so it was clearly no coincidence that Ma Jiantang, head of China’s Statistic Bureau, told the Summer Davos forum that “China’s tightening measures on the property market will not throw a major impact on the country’s economic growth“.

Ma said real estate was only 20% of China’s total investment, and only a “small share of GDP“. He was followed by Xia Bin, of the Bank of China, who noted that investment in the sector had “surged 37% in August versus 2009“, in spite of “the government’s tough measures to curb excessive growth“.

Xia warned that it might take 2 to 3 years to restore normality to housing markets, due to “China’s complicated economic condition and difficulties in its economic restructuring.” But in the meantime, it looks as though this key sector for chemical demand might be in for a bumpy ride.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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