Poor management behind China’s housing bubble

Thursday, April 17th, 2014 By Jack Nevison

Recently, Dateline aired an eerie special on China's "ghost towns," cities and massive building complexes built to house hundreds of thousands of citizens but are home to less than a hundred lonely souls.

China's sky-high rate of investment in construction has worried investors for years, fearing a market collapse on the scale of Lehman Brothers. Could better management have avoided this predicament?

Yasheng Huang,  professor of international management at the Massachusetts Institute of Technology, believes that the consequences may not be as dire as expected for the Chinese economy, but negative effects will soon show. He told the New York Times  "Bad debt leads to crises in some cases and slowdowns in others. Japan averted an explicit crisis but could not get away with stagnation."

China is already suffering from an over-supply of real estate assets and bad loans, and developers are slashing prices by up to forty per cent in selected areas. Yet optimists still believe that the government-backed banks will retain consumer confidence. 

Huang blames poor management by lending authorities for the current situation, explaining that the loans are being made on the basis of property as collateral and being put back into property, making the value of the collateral increase, which results in more loans. This "ring-around-the-rosie" style of lending worries investors, whose success relies on the Chinese market growing steadily. 

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