China’s bid to stabilise its property market is causing jitters

OCTOBER 6TH 1979 was a beautiful Saturday in Washington. It was not the kind of day that augured wrenching change in economic policy. But on that date Paul Volcker, then chairman of America’s central bank, announced a radical plan to quash persistent inflation. Before the battle was won, America’s interest rates reached 20% and unemployment surpassed 10%. Car dealers sent him the keys to vehicles they could not sell, in coffins.

China is now facing its own “Volcker moment”, according to Ting Lu of Nomura, a bank. The government’s aim is not to curb an inflationary spiral (China’s consumer prices are rising only modestly) but to break a vicious circle of property speculation and credit expansion. Regulators are making it harder for developers to raise money and for households to buy homes. The new rules have already pushed several property firms, including the country’s biggest homebuilder, Evergrande, to the brink and contributed to a decline in home sales. But are China’s rulers willing to endure anything like the economic discomfort that Volcker inflicted to achieve their goals? The world may be about to find out.

An Englishman’s home is his castle. In China, a home is much more besides. As well as providing shelter and security, housing often serves as collateral, nest-egg, speculative investment, bride-price and ticket to a good school. Housing makes up three-quarters of household wealth, according to the China Household Financial Survey, a data set compiled by academics in China. It accounts for the biggest chunk of household debt, which by one estimate exceeded 70% of GDP at the end of last year. Local governments raise 30% of their revenue by selling land to developers. And policymakers often rely on homebuilding to revive the economy in downturns.

Property dons other guises, too. The high price of housing is often likened to a “big mountain” (alongside costly health care and education) and a “grey rhino” (an obvious but neglected risk). In March Guo Shuqing, the head of China’s banking and insurance regulator, warned that if house prices were to drop, people holding multiple properties would not only suffer “huge losses”, they might also fall delinquent on their mortgages, endangering the banks and leading to “economic chaos”.

The government wants property to play a more modest role. In December 2016 President Xi Jinping said homes were for “living in, not for speculating”, a phrase that officials now often repeat. In 2019 the Communist Party declared that property was not a tool for short-term economic stimulus, a commitment reiterated at a meeting of the ruling Politburo in July.

The authorities are facing the grey rhino more squarely by trying to tackle the industry’s financial fragilities. Last year regulators capped the share of mortgages and property-related loans that banks may…