Reason Writers Around Town: Shikha Dalmia and Anthony Randazzo on China's Real Estate Bubble

Stimulus enthusiasts point to China's success in aborting its recession as proof positive that their spending prescriptions work. But as Reason Foundation analysts Shikha Dalmia and Anthony Randazzo explain in The Wall Street Journal, an examination of China's stimulus policies reveals a massive misallocation of capital, producing a real estate bubble that could bring down China's economy. As Dalmia and Randazzo write:

Beijing's mandarins haven't discovered some magical formula to spend and inflate their way out of a recession. Pouring liquidity into real estate is the Keynesian equivalent of digging ditches and filling them with stones. Unfortunately, the Chinese economy has fallen into one—a ditch, that is. The U.S. might have endured a bad recession. But so long as it avoids the second stimulus that China enthusiasts are advocating, it might be up and running while China is still digging itself out.

Read all about it here.

Comments

[Corduroy]

Bert Dohmen has been calling the real estate bubble in China for at least a year now. Reason should bring him in for another video interview.

[Joe Blow]

Any links to the full article?

[Spiny Norman]

If you search on "China's Looming Real-Estate Bubble" in Google News, you can access the complete article even if you're not a subscriber.

[Aresen]

Well, let's watch and see how Krugmanomics works out.

[R C Dean]

Two thoughts:

(1) The Chinese have some interesting alternatives to draining their real estate bubble, which came about in part because of limited investment opportunities for Chinese citizens. As they open up other investment vehicles (which I understand they are starting to do), wealth should start to flow elsewhere and could set up more of a soft landing.

(2) I'm not sure how much of the Chinese real estate bubble is credit-driven. The more a bubble is credit-driven, the harder the landing when it pops. For real estate in particular, a credit-driven bubble takes down banks when it pops.

[J sub D]

China has nothing to fear, they are being led by a reasonably enlightened group of people. So sayeth Friedman.

[Alan Vanneman]

"...producing a real estate bubble that could bring down China's economy."

"The U.S. might have endured a bad recession"

"it might be up and running"

If wishes were horses, then Reason Foundation analysts might be able to ride.

I'm not a fan of the Chinese economy, long-term (I'll keep investing in the U.S. stock market), but this "analysis" is scarcely more than wishful thinking. R C sounds smarter than Shikha and Anthony put together.

[Tulpa]

I stopped reading after "Shikha Dalmia".

[Laoshi]

Probably after watching the U.S. government pressure banks into low down loans to unqualified buyers and seeing the results, the Chinese government and banks set new standards for house loans in China last May. For first time home buyers 30% down is now required. If a family wants to buy a second house, 50% down is required, and there are no loans for third houses. This cut off much of the speculation buying, however house prices remain high in Shanghai and Beijing. Hainan Island, China's Hawaii, saw massive increases in condo prices at the start of the year, however, some lower tier cities like Nantong saw only moderate increases in house prices before the credit cut off. They may be able to produce a softer landing for their real estate bubble than we had here.
For a country in which few people made more than $150 a month twenty five years ago and in which there were no private cars, the comparison to now is overwhelming. Now wonder the left and left media hates China so much. It has been showing what the free market can do compared to socialism. When they committed the absolute heresy of abandoning socialism they may have aroused the ire of the American left, but they moved from poverty for everyone (except bureaucrats) to the highest standard of living the country has ever had.

[Rewrite]

I can't get past the first paragraph without a WSJ subscription.
Racists!