Andy Xie: Frayed String for China's Property Balloon

Andy Xie talks about China's property market in his latest, Frayed String for China's Property Balloon:
Beijing's economic policies have been favorable to people in the low-income bracket over the past few years through rural subsidies, agricultural land reform and price controls for necessities. The resettlement policy is another element designed to help them. But the middle class is paying the price while their most important expenditures – property, cars and education – are highly inflated. Indeed, China's property and car prices are among the highest in the world in absolute terms, and by far the highest relative to income. Unless policies change dramatically, the middle class squeeze will get worse.

China's property market is a massive bubble. The stock of residential properties, developer inventories and land pledged to banks by local governments exceed by three times the nation's gross domestic product. Rental yields in most cities fail to cover depreciation costs. The price-to-income ratio, a measure of housing affordability, is routinely above 20 in major cities, which means an average Chinese citizen would spend his or her entire income for 20 years to buy an average-priced property.

The bubble can continue because China's banking system has plenty of liquidity, partly thanks to hot money and because governments have many levers to channel bank liquidity into the market. But the longer the bubble lasts, the more damage it will do to the economy.
Read the whole thing.

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