After having fueled a housing bubble, China is slamming on the brakes with new regulatory tightening coming out of the country almost every week. Investors should watch China to see how things play out in this cycle, according to Julia Coronado, president of MacroPolicy Perspectives. Expansions don’t die of old age, but they often die from credit bubbles, she noted.
Speaking at the Rutgers Business School’s Center for Real Estate capital allocation conference in Short Hills, N.J., Coronado, noted that China is driving the global growth cycle, accounting for more than half of the growth directly, and also through the country’s impact on commodity prices. Thus, “The ebbs and flows aren’t coming from the US, they’re coming from China,” she said.
Recent Chinese growth has been driven by credit, and the “piper will have to be paid at some point” by slowing down, she said. When the country tried to rein in its credit in 2014 and 2015, it nearly ended up crashing the global economy. China is slamming on the brakes again, and the question is whether it can engineer a soft landing this time. The tailwind the world has experienced from China is going away and will become a headwind, said Coronado.
Although the US Federal Reserve is trying to crawl forward with its interest rate normalization, the bond markets are skeptical, Coronado noted, and she believes the bond markets are right. She doesn’t expect interest rates will go up materially in this global environment. As she sees it, the high levels of US debt will limit the ability of interest rates to rise, and this is good for real estate investors. “The choices are hard, there are no low-hanging fruit,” she noted. Economic policy uncertainty is on the rise in the US, and its also high in China and European countries.
Tags: China, housing bubble, MacroPolicy Perspectives, Rutgers Business School