China is giving global markets a headache. The economy is at risk of overheating and the authorities are trying to cool it down. The property market in particular has become “irrationally exuberant”, says Ronnie Chan of Hang Lung Properties.
So Beijing is “coming in with both barrels”. Measures such as increasing down-payments and mortgage rates have significantly lowered sales volumes. Prices could now fall by 20%-30%.
The broader worry is that clamping down on credit-fuelled growth will lead to a hard landing. The lending spree has resulted in “a glut of commercial office space” and “near-vacant” shopping malls, as well as pushing up residential property prices, says Karen Maley in Australia’s Business Spectator. Once the bubble bursts there could be “mass defaults among manufacturers and property developers”, leading to a “huge” bad loan problem.
In the meantime, a row over China’s currency could also rattle markets. China has kept the yuan pegged to the dollar for two years to shield its crucial export sector from the slump in global growth. America, its biggest trading partner, says that keeping the yuan artificially low gives it an unfair trade advantage and is urging China to revalue it.
Earlier this year China signalled that it could let the yuan rise in the summer. But “there is a good chance that the European crisis has prompted a change of heart”, says Geoff Dyer in the FT. The yuan has risen by 24% against the euro since late November and the sovereign-debt crisis has damaged the growth outlook in the eurozone, China’s second-biggest export market. Ending the yuan-dollar peg now would undermine exporters further.
So China may hold off. As mid-term elections are approaching in the US and unemployment seems likely to stay high, pressure from Congress “to take action against China… may become too much”, says James Saft on Reuters.com. Measures such as tariffs on Chinese imports could well spark retaliation. A trade row on top of fears of a double dip in the West “is the last thing markets will want to contend with”, says CLSA’s Christopher Wood. “But they may have to.”