China's Land Grab Could End Badly

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Building things—roads, airports, train lines and the like—has long been a staple of China’s economy. Now, headline investment growth levels are stalling. That’s worrying enough. The situation behind the figures is, perhaps, even scarier.

China’s year-to-date investment growth in May slowed to 6.1%—the lowest since the mid-1990s. Even that weak figure is misleading, because a land price bubble is flattering the data. Nominal real-estate investment was 10% percent higher in the first five months of 2018, including a whopping 69% rise in land investment. Actual spending on construction and installation dropped 3%.

The last time land prices rocketed this way—in early 2014—a steep crash ensued several months later, which pushed bond defaults through the roof. Policy makers hurriedly reversed a crackdown on shadow banking, and unleashed a big economic stimulus instead.

Property developers have also borrowed heavily this time round, often from shadow banks, to buy expensive land. If housing prices drop, much of that debt could soon run into trouble.

This puts policy makers in a bind again. They need to loosen monetary policy to keep investment from dipping too low—without pumping up the land bubble and pressuring the yuan, which would make it harder for developers to service their dollar debt piles. So far, Beijing is trying to reign in land-related lending, for example by curbing loans for “slum redevelopment.” But it is also easing lending conditions more generally: China’s key short-term interest rate has fallen about 20 basis points since April to 2.7%

After the 2014 property crash, China’s central bank struggled to stimulate investment without pumping up other bubbles—back then in stocks—and capital outflows.

In December, 2015, a resident walks through an apartment block, on the outskirts of Beijing, that was undergoing forced eviction.

In December, 2015, a resident walks through an apartment block, on the outskirts of Beijing, that was undergoing forced eviction.


Photo:

how hwee young/European Pressphoto Agency

Improved capital controls may give Beijing more ability to ease policy now without sparking destabilizing capital flight. And significant falls in developers’ housing inventories and in excess industrial capacity since early 2015 may mean apartment and steel prices won’t fall too far—helping companies service their debts.

That is the positive story. But if housing prices in China do start dropping rapidly, or big capital outflows re-emerge, the next 12 months could see Chinese currency and debt markets once again running into major trouble. With the U.S.-China trade conflict rapidly escalating, global markets don’t look particularly well prepared for that.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com

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