Another lesson taught by Ireland

Another lesson taught by Ireland16:42, November 22, 2010
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By Li Hong
Financial crunch has dealt another sovereign country a victim. Following Japan, the United States, and Greece, Ireland has been trapped in a hole, asking a bailout from the European Commission and the International Monetary Fund.
It is reported that the small European country's economy shrank 7.1 percent in 2009 and remains in serious recession now. Disillusioned Irish youth, like their forefathers, are heading abroad to Australia and the Middle East to look for jobs.
Signs of Irish downturn are scattered, with Dublin's major shopping districts full of for-rent posters and previously boisterous office complexes looking increasingly vacant easy passing day. Irish banks are the hardest hit, because depositors have drained their savings. To keep solvent, companies are cutting expenditures by sending employees home. Now, the Irish government and the banks will have to accept tough austerity conditions demanded by the creditor organizations.
What has caused the Irish financial meltdown? Simple and clear: Ireland is another example of housing-bank financing mess.
We have seen exactly the same debacle displayed in Japan in the 1990s and in the United States merely two years from now. The governments and central banks there had inspired housing bubbles and "pseudo property prosperity" with excessively easy loans, which all burst in the end and sent the economies into relentless declines.
Many countries, drawing lessons from Japan and the U.S. boom-and-bust cycles, have raised vigilance against possible property bubbles by erecting barricades to thwart housing speculation and rein in runaway prices, except in China. It is not because China, a "socialist" country claimed by the officials, is immune from a housing-incurring financial meltdown. Many people just do not believe that China, still in its initial phase of growth and on the threshold of rapid urbanization, will ever fall to diminishing demands.
A property frenzy is raging on, despite Beijing's propaganda that it will do all it can to cool the market down. The China Business News reported yesterday that the prices of 19 residential apartment towers now on sale in Shanghai are higher than 50,000 yuan per square meter. And, more plush houses in Shanghai, Beijing, Guangzhou and other big cities are selling at more than 100,000 yuan. Startling? You bet.
In mid April, China's central government meted out a group of tightening policies to curb housing investment and speculation. The measures include higher down payment and interest rates for owning second and more houses. However, the policy-makers, possibly under the powerful lobbying of the vested interests -- include the local governments -- are disappointedly slow to take harsh tax policies to damper the prices. China's provincial governments are worried that a ‘throttled' commercial real estate market means lesser land sale revenues for them.
Beijing has balked at levying property taxes on buying second and more houses, which has encouraged housing investors to borrow from the banks and purchase homes. As urban housing resources are concentrated in the hands of a few investors, prices fly. Although the real estate industry has boosted the economy, and created a slew of property tycoons, it has also generated grave risks to the broader economy.
When the mortgage defaults hit home, the banks will fester on a pile of bad loans. And, while a few giant banks are troubled by non-performing loans and cannot get refinanced, a run on the banks will begin, sending the economy to contraction. It has happened in Western developed countries, it is happening in Ireland, and if China does not take precautions now, it could also happen here.
It is said that China's banks have taken "pressure tests" to check their credit viability, if the housing prices tumble by 30 to 50 percent. The results are not revealed to the public. It is widely feared that if the prices decline by 40 percent, the banks will have trouble to take mortgages back from the multiple house investors. So, it is crucial for the government and the central bank resort to a package of choreographed policies to gradually bring down the housing prices.
In the United States, average housing prices have declined 30-40 percent since early 2008, knocking off the country as much as $6 trillion of housing wealth and sending it into a long struggle to come out of the crisis. Japan remains reeling in the stagnation. Evolution in Ireland will unfold. The lessons are too bloody that late-comers like China should not just cast aside.
The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.