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The China Syndrome

March 26th, 2014 - 3:01 pm

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The insolvency of a property developer in east China’s Zhejiang Province has shed light on the risk in China’s formerly red-hot real estate sector.

Due to the slowing economy, tightened lending and market expectation of a moderation, China’s home prices have seen smaller gains in large cities recently. But in some smaller cities, the housing market has cooled considerably, with sales tumbling and prices stagnant or declining.

The cooling took its toll on the Zhejiang Xingrun Real Estate Co. based in the city of Fenghua as it failed to pay off a total of 3.5 billion yuan (565 million U.S. dollars) in debts.

China’s real estate sector was red-hot because Beijing was shoving money at it like a nineteen-year-old boy at his first strip club. Beijing’s goal was GDP growth, any kind of GDP growth, in order to create enough jobs for the armies of peasants leaving the interior for the coastal cities. No jobs, no security for the nomenklatura. What to do if the bubble ever were to pop was always a can to be kicked further down the road. In the meantime, just keep shoveling cheap money at the problem.

Good thing nothing like that could ever happen here.

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