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China must reexamine housing to continue sustainable growth

Updated: 2012-03-15 15:01


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CHICAGAO - China's negative real deposit rates for households have led to an overweight investment in residential housing that must be reexamined if the country is to sustain economic growth, an economist said Wednesday.

Nicholas Lardy, a senior fellow at the Washington-based think tank Peterson Institute for International Economics, said that China's negative real deposit rates -- as nominal interest rates are below inflation -- since 2004 have made investments in banks unattractive for households.

Without this outlet in the banking sector, the Chinese people looked to alternative forms of investment, especially residential housing, which last year comprised more than 9 percent of the country's gross domestic product (GDP) and 40 percent of all Chinese household wealth, he said.

By comparison, the US housing market took up about 6 percent of GDP at its peak in 2006, before the bubble started to collapse, and households held about 33 percent of wealth in residential property.

"It's very hard to find an economy where this high a share has gone into residential property," said Lardy, who spoke at the Chicago Council on Global Affairs.

However, the Chinese housing market is not completely comparable to the US housing bubble as Chinese households are not using economically unsound leveraging policies, Lardy said.

But such overweight investment in residential housing could pose a "macroeconomic risk" to the Chinese economy, Lardy said, as demand for real estate-related products could drop significantly when housing investment shrinks.

"It might not be the financial sector that suffers directly from a slowdown in housing (as in the United States) but ... if the demand for cement and steel and copper and aluminum and a lot of other products softens because housing investment comes down to a more sustainable level, then the economy is going to slow down quite significantly unless there is some other offsetting source of demand," Lardy said.

The economist believed the best way to address the problem is to phase out the negative deposit rates that cause Chinese people to favor real estate as an investment.

Such a measure would stimulate private consumption which, compared with the residential housing boom, is a more sustainable engine for China's economic growth.

"Unless they have some alternative driver of economic growth, it's likely their overall GDP growth could slow down quite substantially, so they need to generate more private consumption expenditure," said Lardy, author of the book "Sustaining China's Economic Growth After the Global Financial Crisis."

Restrictions on the real estate sector are one of the hotly debated topics at this week's annual sessions of the National People's Congress, China's top legislature, and top political advisory body, the National Committee of the Chinese People's Political Consultative Conference, in Beijing.