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Growing property bubble is China economy’s biggest risk, warns Bank of China economist

The Bank of China has raised a red flag on the country’s growing property bubble.

“A property bubble is the biggest risk for China’s economy,” Zhou Jingtong, a senior economist with the state-owned commercial bank said at a briefing to release the bank’s quarterly economic outlook report on Thursday.

Skyrocketing home prices would “exacerbate the wealth gap and economic woes”, he said.

“Property speculation becomes common practice and everyone is dreaming about windfall profits overnight … these are very dangerous,” he said.

Residential prices in major Chinese cities, from Shanghai to Shenzhen, are rising at an annual pace of 30 or 40 per cent in 2016, sucking the majority of bank credit into the property market and pushing prices beyond what is affordable for most residents there.

Policymakers’ ‘misguided’ home-buying limits won’t keep lid on China’s surging property prices: economist

Municipal authorities in Nanjing and Hangzhou are trying to tame property price gains by imposing restrictions on home purchases, but the measures have proved futile amid frenzied buying, limited supply and ample monetary supply.

Bank of China economists wrote in its quarterly economic outlook that a red-hot property market would complicate policy decisions for Beijing, which is already struggling to pursue objectives that range from defending a stable yuan exchange rate to keeping growth on track at home.

“Macro policies are in urgent need to strike a balance between stabilising growth and curbing asset bubbles,” according to the bank, the country’s largest foreign exchange dealing bank.

A harsh crackdown on the property market would endanger an already fragile economy, but “unrestrained growth” of the property market would result in increasing leverage and signal greater financial risks, the bank said.

While a strong property sector can help investment and overall growth – the bank is forecasting a 6.7 per cent headline GDP growth rate for the fourth quarter, it could hurt the manufacturing and other sectors.

Risks of property bubble growing in China with policy options running out

Average investment returns in manufacturing dropped to 5.4 per cent in 2015 from 6.7 per cent in 2006, while the investment return of listed property firms rose to 13.6 per cent in 2013 from 8.2 per cent in 2006.

The property bubble could weaken China’s capabilities in handling possible impacts on yuan exchange rate from an interest rate increase at the Federal Reserve, according to the Bank of China report.

Fan Gang, an academic advisor at the People’s Bank of China, said at a forum in Tokyo that the yuan has weakened as a correction in recent years, Xinhua reported. It is natural for the Chinese currency to weaken against the dollar alongside the pound sterling and the euro, Fan said.

How to solve China’s property bubble

As China’s property bubble grows larger, the chance for China’s central bank to cut interest rates is lessening, according to Bank of China economists.

“The central bank has to give more weighting to asset price risks in its monetary policy operations,” said Wang Youxin, a Bank of China researcher.