Economist Online

Recent bubble pricking measures by China’s policy makers have had a big impact on the price of China’s real estate market. I think in general this is healthy for China – the earlier the bubble got deflated, the less damage will the bubble bursting do to the Chinese economy.  As I said before, China stands at the forefront of bubble containing experiment.  Let’s see how far the government measures can go…but so far, I like what I have seen.

Here is the latest report from WSJ.

The global economic recovery has drawn support from a swift rebound in China. Now, investors and economists wonder whether a bursting Chinese property bubble could put China’s economy in a bind.

Over the past week, China’s cabinet has announced measures aimed at cracking down on property speculators, including tougher down-payment requirements for second and third homes. This comes after China reported an 11.7% rise in urban home prices last month from a year earlier, its fastest gain in five years.

“This is the critical policy point that finally cracks the Chinese property market,” declared Morgan Stanley China strategist Jerry Lou.

All this could be seen as bolstering the case for short-seller James Chanos. The name of Mr. Chanos’s $6 billion hedge fund, Kynikos Associates LP, means “cynic” in Greek—appropriate since the New York-based money manager earlier this year made himself the world’s best-known cynic when it comes to China’s growth story.

“What we’re talking about is a world-class, if not the, world-class property bubble,” Mr. Chanos said in an interview with Charlie Rose, comparing conditions in Chinese cities to Dubai and Miami. He predicts the bubble will begin to unravel later this year.

Mr. Chanos argues that China’s lending spree during the financial crisis has pumped too much money into real estate, and that housing prices have surpassed affordability.

Among the counter-arguments: China’s growing wealth feeds a long-term demand to upgrade the country’s housing stock, and regulators put a tight cap on loan-to-value ratios, limiting the downside of any bubble. Some note that China’s government, using measures such as those announced in the last week, has long avoided a crash in housing prices.

Those inclined to favor Mr. Chanos’s analysis—or who at least believe that some kind of correction is likely—could try to emulate his strategy. He is betting on a decline in the price of Hong Kong-listed Chinese property developers and other companies linked to China’s property market, such as those exporting cement and copper to China.

More update after my previous post on China’s curbing on real estate bubble:

The latest news came in from China:

In my view, China stands at the forefront of the policy experiment of pricking asset-bubbles.  Many economists and central bankers hold the view that bubble is impossible to detect; instead, policy makers should focus on minimizing the damage in the aftermath of bubble bursting. Former Fed Chairman, Alan Greenspan, is one of them.

The recent financial crisis taught us an important lesson, i.e., central bankers should take a pro-active role in containing the bubble – the damage left by bubble bursting is just too great to ignore, especially to the employment.

China’s case is especially interesting – unlike Western central bankers, so far Chinese policy makers have largely relied on administrative measures, instead of the traditional policy instruments, like interest rates.

I would think the new regulation on down-payment would be quite effective.  However, it’s an open question how strictly Chinese policy makers would want to implement such policy; and how long and how far the policy makers would allow the price to fall, without worrying about the stability of the system – yes, I am talking about the stability of political system.

If speculators know the government isn’t going to allow the price to fall (or fall too much), then this will eventually create a Moral Hazard problem – Next round, when new policy measures come about, real estate developers and speculators just hold up, accumulating housing inventories, anticipating the policy will soon reverse.  This will essentially render polices ineffective.

So all in all, we may never really get rid of bubble – as long as there is human greed and fear, and no matter which system you are living in – unregulated or heavily regulated.

That America may enter a Japan-like very slow growth for quite some time is still not completely out of woods. The United States is not Japan, but the aftermath of a great asset bubble can never be underestimated.

(click to enlarge; h/t: Big Picture)