Markets

Can China Actually Deflate Its Real-Estate Bubble?

By Constantine von Hoffman

Updated on: August 30, 2011 / 8:44 AM EDT / MoneyWatch

The Chinese central bank has come up with a very smart way to deal with the nation's overheated real estate market. It is requiring banks to keep more money on hold, a move that simultaneously decreases lending and increases bank reserves for the inevitable market bust.

This move -- along with an increasingly rigorous effort to monitor land speculators -- shows Beijing's determination not to fall into the same traps that its capitalist counterparts have.

The new rule by the People's Bank of China could take a total of roughly $140 billion out of the system. China's banks issued an average of around $103 billion in new loans each month in the first seven months of 2011.

This move further strengthens China's biggest banks by requiring them to have capital reserves of 21.5 percent of all deposits. Previously, the requirement had only applied to normal deposits. Now it includes margin deposits, which are used by corporate clients to obtain bankers' acceptance notes and letters of guarantee. By the end of July, margin deposits totaled $714 billion.

China has also increased efforts to crack down on land speculators through a new inter-city database of housing ownership and purchases. The government hopes the database will reveal when people buy several properties in some of the nation's 40 largest cities According to the official China People's Daily newspaper:

Analysis of these records will show the money flow from one city to another, thus helping the authorities to supervise more closely the housing market in different areas and reduce speculation.

Given China's notoriously lax record keeping, it remains to be seen how effective this will be. On the other hand, Chinese authorities have both investigative and enforcement techniques denied to officials in most developed nations, so the threat may carry more weight than the actual database.

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