Chinese Monetary Official: Housing Risk Greater than in US, UK Pre-Crisis

An interview with the Financial Times by Li Daokui, who serves on the Chinese central bank’s monetary policy committee, included uncharacteristically candid comments on the state of China’s housing market and by implication, the direction of Chinese interest rate movements.

From the Financial Times:

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”…

Mr Li said the high cost of housing could hamper future growth by slowing urbanisation. Rising prices were also a potential political flashpoint, especially among younger people who felt locked out of the property market.

“When prices go up, many people, especially young people, become very anxious,” he said. “It is a social problem.”

In spite of the sharp slowdown in property sales and the troubles in Europe, he said economic activity was still too strong. “China is running the risk or is on the verge of overheating,” he said. Although he added: “I would say the situation is not out of control.”

Yves here. Many observers had assumed that China would not raise rates. But the interview makes clear that rising social pressures are leading the government to try to take the air out of the housing bubble. The government appears to be starting with measures like tax measures that affect real estate only (a plan to “reform” real estate taxes was announced Monday). But Li’s concern re overheating generally suggests that interest rate increases are far from off the table.

Update 12:30 AM: Reader purple pointed out that Li’s remarks seemed at odds with Wen Jinbao’s. Wen focused on the sovereign debt risk, and indicated that more, rather than less, stimulus was in order. From Reuters:

Striking a more optimistic note, China’s Wen said the world’s third-largest economy and its prime growth engine remained on course to meet its growth targets this year, though he added it would require Beijing to “maintain a certain level of intensity in its economic stimulus.”

Yves again. We’ve noted previously that analysts differ considerably in their estimates of Chinese inflation, and that any look at Chinese fiscal and monetary policy suggests meaningful inflation is a likely result:

The government has engineered an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

Even though the FT article on Li suggested a revaluation of the renminbi was a possible outcome, high domestic inflation would make Chinese goods less competitive all on its own.

Originally published at naked capitalism and reproduced here with the author’s permission.