China Attempts Controlled Deflation of Property Bubble

How big is China’s real estate bubble?

Here’s a comparative measure to give you a fair idea: In New York City and London, home prices are roughly 10x the average annual income. In Beijing and Shanghai, home prices are about 30x what residents earn in a year.

Hence, Chinese authorities are attempting to deflate prices without hurting the economy – a “gentle” deflation. One major push has been to restrict the leverage of property developers.

A Feb. 7 Bloomberg headline sums it up:

China’s Taking on a Risky Bubble Deflation Experiment

However, back in December, Elliott Wave International’s monthly Global Market Perspective said that a methodical and controlled deflation is not in the cards:

According to various summaries of China’s real estate “reckoning,” the Chinese property market is a “House of Cards.” After comparing the situation to peer-to-peer lending programs that “operated like giant Ponzi schemes,” one article concludes, however, that the “bursting of the bubble likely won’t trigger a crisis similar in scale to the American recession of 2008.” We agree: It won’t. The scale of the unfolding peak is much larger, so the crisis will be much larger as well. Despite the recent deterioration in China’s real estate market, belief in the Chinese government’s capacity to manage the crisis continues to run high. This is true even as it turns further away from capitalism and further toward communism. As the Global Market Perspective noted in October, China’s government recently revealed its willingness to micromanage every aspect of the economy in the name of “Common Prosperity.” The slogan comes directly from the original communist party chairman Mao Zedong, who introduced it in 1953. It didn’t work out so well the first time as China saw no material growth in GDP from 1958 to 1975. The irony of its reintroduction should prove even more profound this time.