Chinese property market signals possible reversal

In a sign that could have ramifications for global markets in both equities and commodities, Chinese property prices fell in June, the Financial Times reported on Monday. After 18 months of sometimes steady, sometimes meteoric rises, the average price of housing in 70 major cities fell slightly, by 0.1 percent.

The Chinese government has been fighting to cool down the real estate market, which many fear has entered into a bubble as bad or worse than the subprime mortgage bubble.

China also faces social unrest issue, the FT reports, as a combination of internal migration and real estate speculation push the price of apartments higher and higher. The government is trying to ward off a collapse in the market, instead attempting to engineer a so-called “soft landing.”

A true collapse in the Chinese market could trigger a series of catastrophic financial events, especially among countries that depend on exports to the industrial giant. Stock indexes in commodity exporters like Brazil and Australia would definitely fall, led by mining giants like Vale and Rio Tinto. Crude oil futures and copper futures would likely fall, and gold futures might rise as traders look for an exit in the form of a haven asset.

Many Asian stock indexes would likely take a big hit, and in the run up to a potential crisis, index futures may or may not reflect this.

In the U.S., it is difficult to say what might happen. Much will depend on the Chinese government’s response to any emerging crisis, and how it deals with the potential for bad debt and insolvency in its own banks. Reliable information about the Chinese financial system is difficult to come by.

Some Asian market experts say that official reports are composed of equal parts optimistic political posturing and outright fabrication. It is known that many of the loans on Chinese banks’ books are already non-performing.

The Asia Times reports that the government’s China Banking Regulatory Commission admits that Shanghai banks could lose 5 billion yuan, which equals 6 percent of their 2009 profits, on an average property value drop of 30 percent.

One positive note is that the Chinese government has, in some ways, more room to maneuver than the U.S. did in 2008. The government has strong revenues, enormous reserves and a generous fund of domestic savings. Furthermore, its centralized power would allow it to act more decisively to stem a crisis, without worrying about political considerations.