Chinese Banks Prepare For Housing Bubble Burst

I’ve been talking about the potential housing bubble that is growing in China for several months now, because I think it is a very important topic that is not really getting a lot of play in the media.  This is likely because we face so many pressing domestic economic issues right now (unemployment, an ailing housing market, a rash of foreclosures, flagging consumer confidence, etc).  It is also possible that the average consumer of media does not totally understand the implications of a bursting Chinese real estate bubble.

Either way, Bloomberg.com has an article today that is a little bit scary.  It says that China’s banking regulatory body is having lenders and banks conduct stress tests to determine the impact of a 60 percent housing price decrease.  This is considered a worst case scenario, prior stress tests have assumed 30 percent decreases in Chinese housing prices.  A previous article I discussed by Mike Shedlock at Global Economic Trend Analysis suggested that the typical home in Beijing goes for 22 times that average income level, a number which is not sustainable.  The same article says that much of the Chinese residential real estate market was based upon a Ponzi-esque lending scheme that is nearing the breaking point.  I recommend reading the article because it gives a good backround on the housing market in China.

The Bloomberg article says that $1.4 trillion worth of loans were issued to Chinese borrowers last year.  Earlier in the year regulatory officials tightened lending standards and tried to cut back speculation, but this may be a case of closing the barn door after the horse has bolted.  This was prompted by a whopping 68 percent increase in home prices from the first quarter of 2009 to the first quarter of 2010.

According to Bloomberg, home prices in 70 Chinese cities fell slightly from May to June, the second month in a row there have been slight declines in property values.  You might recall that the bursting of the housing bubble in the United States started out the same way, slowly at first and than precipitously later.

In addition, the article cites a speech that Kenneth Rogoff, a Harvard Professor and former chief economist for the International Monetary Fund made in July where he warned that China is beginning a housing “collapse” that will have dire implications for the Chinese banking system.

This could have vast implications on the worldwide financial system.  China has been one of the few bright spots in the global economy for at least two years.  Growth in China has largely been responsible for what growth has occurred globally.  Economic strife in China will put a huge damper on global growth and will likely sap whatever momentum our own economic recovery still has.

Do you have any opinions about the housing bubble in China?  Maybe you’ve read some interesting articles I’ve missed and would like to share them.  Let me know in the comments section below.