WHO'LL BE THEIR MEXICANS?:

China's spectacular real estate bubble is about to go pop (Jeremy Warner, July 22nd, 2011, Telegraph)

House prices look like being a major victim of this slowdown. Up to a point, this is deliberate policy for China. With the example of the Western property bubble, which ended very badly indeed, serving as a salutary reminder of the dangers of unchecked real estate prices, the Chinese authorities have taken a number of steps to cool the country's overheated housing market. And it is working; residential property prices have risen on average by "only" 7pc over the last year, and transaction volumes are lower.

But here's the problem. Residential and commercial property development have been such a big component of growth in recent years that anything that damages the property market risks upsetting the entire apple cart. Nobody can forecast with any certainty when the crash will come, but come it will. You cannot cram that much development into such a short space of time without there eventually being a correction.

And when it comes, its knock on consequences are going to be extreme, possibly just as seismic as the rolling series of banking crises we've had here in the west. As noted in the IMF's latest staff report on China, published this week, the property sector occupies a central position in the Chinese economy, directly making up some 12pc of GDP. It is also highly connected to the health of basic industries such as steel and cement, and to the success of downstream industries like domestic appliances and other consumer durables.

More worrying still, direct lending to real estate (developers and household mortgages) makes up around 18pc of all bank credit (see second graphic below). Again, even by UK standards, this is extreme. And for local authorities, which account for 82pc of public spending in China, property related revenues are an important consituent of the overall revenues used as collateral to back borrowing to fund property and infrastructure development. There's an element of ponzi scheme here.

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