China economic miracle will face speed bumps......

There is an over-reliance on real-estate for economic growth in China that is increasing the long-term risks for the nation. Much of the real-estate depends upon loans from banks. Over-exposure to this sector will eventually become a drag on growth as the inevitable need to recycle these assets into more productive uses will force prices lower and cause large losses at these institutions. An excerpt from the South China Morning Post....

Bank exposure to the real estate sector has been at the root of previous financial crises worldwide including the savings and loan crisis in the United States, Japan’s bubble economy, the Asian financial crisis, and now Dubai World. All these crises share in common aggressive and exuberant real estate lending, an abundance of liquidity and the false belief that real estate can only rise in value. If total exposure to real estate secured loans was transparent within the Chinese banking sector, it would approach 40 per cent of total lending – the same level of total loan exposure reached in Japan in 1989, when it was believed Japan would dominate the economic landscape for decades.

It is important to recognize, that the problem assets will constrict lending and this will impact even those enterprises that are economically viable.

From this blog.