Divert funds from real estate to real economy

The real estate market in Shenzhen recently exhibited a bullish tendency, similar signs also emerging in Shanghai. This was largely bolstered by public expectations of asset price rise in a relatively loose monetary environment.

In the backdrop of the fight against the novel coronavirus outbreak, banks’ credit standards for small and micro businesses have been greatly relaxed, but some loans acquired for running businesses have flowed into the real estate market, fueling a drastic rise in housing prices in Shenzhen.

This is not unusual. With investment and demand remaining weak, a relatively easy monetary policy, especially when banks are encouraged to issue loans to enterprises, will not necessarily enhance enterprises’ willingness to increase investment in production. And some companies are more than willing to use the acquired bank loans to do other things, such as investing in real estate. For example, in 2009, a large number of Central and private enterprises successively entered the real estate industry, causing the flow of a large amount of corporate credit funds into the real estate market and resulting in a huge rise in housing prices in a short time.

In an environment of insufficient demand, while expanding credit supply, particular attention should be paid to prevent the economy’s “from-real-to-virtual” shift and the flow of excessive funds to the property sector.

A significant number of companies have chosen to diversify investments in the belief that crossbusiness opportunities still exist. However, most of these investments may not pay off in the long run, and instead plunge them into debt.

The rise in real estate prices in Shenzhen is also linked to a large number of outsiders settling down there in recent years. That, coupled with reports of increased construction activity in the region, has fueled market optimism leading to rising housing prices. However, it is important that the authorities check the rising housing prices in the city to avoid increasing the cost of doing business. It is hoped that relevant departments in Shenzhen are taking timely measures in this regard.

When the lack of demand coexists with a lot of liquidity in the market, some money is bound to flow into the assets sector because the relatively excess capacity narrows the room for other investment. So, the authorities should rigorously vet every sum of bank loans, and strengthen market regulation. While maintaining reasonably abundant liquidity, the authorities also need to accelerate structural reforms to guide the flow of funds to the real economy.