China is now facing its own “Volcker moment”, according to Ting Lu of Nomura, a bank. The government’s aim is not to curb an inflationary spiral but to break a vicious circle of property speculation and credit expansion. Regulators are making it harder for developers to raise money and for households to buy homes. The new rules have already pushed several property firms, including the country’s biggest homebuilder, Evergrande, to the brink and contributed to a decline in home sales.
Property dons other guises, too. The high price of housing is often likened to a “big mountain” and a “grey rhino” . In March Guo Shuqing, the head of China’s banking and insurance regulator, warned that if house prices were to drop, people holding multiple properties would not only suffer “huge losses”, they might also fall delinquent on their mortgages, endangering the banks and leading to “economic chaos”.
The authorities are facing the grey rhino more squarely by trying to tackle the industry’s financial fragilities. Last year regulators capped the share of mortgages and property-related loans that banks may hold. They also imposed “three red lines” on prominent property developers, limiting the size of their debts relative to their assets, equity and cash.
Will the regulators blink? In the past, policymakers have been quick to ease property curbs in downturns. A big drop in house sales or prices over several months would probably “jolt the government into a more dovish stance”, argues Rosealea Yao of Gavekal Dragonomics, a consultancy. But Mr Lu believes it will be hard for leaders to reverse course. They have publicly committed themselves to a tighter policy and created bureaucratic momentum behind it.
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