Canada's Housing Bubble

Feb 12, 2010 David Pierson and Don Lee Los Angeles Times

Beijing - Amid growing fears of a real estate bubble, Chinese officials moved Friday to restrain bank lending and put a lid on incipient inflation, a surprise action that shook financial markets around the world because of concern that the leading engine of the global economic recovery could be slowing.

China's government is worried that an overheated real estate market could unravel the nation's economic gains.

China's action will require banks to set aside more reserves with the nation's central bank, instead of lending the money to businesses and consumers. It was the second such step in a little more than a month and is aimed at curbing excessive borrowing, which has stoked government worries that China's economic gains could be undone by an overheated real estate market.

In the United States, stocks initially fell sharply on the news amid concerns that any slowdown in China could dampen the U.S. economy. Stocks cut their losses and closed mixed but the Dow and other major indexes posted gains for the week, their first after four losing weeks.

Just the whiff of a slowdown in China was enough to batter shares of industrial companies and materials producers. That's because a slower-growing Chinese economy would mean weaker demand for industrial goods like metals and jet engines. Commodities prices also fell, which hurt companies that rely on oil, copper and other basic materials to make money. Benchmark crude for March delivery fell $1.15 to settle at $74.13 a barrel on the New York Mercantile Exchange.

U.S. markets are closed Monday for Presidents Day.

The concern about China mainly overshadowed a Commerce Department report that retail sales grew more than expected in January. Retail sales rose 0.5 percent last month, more than the 0.3 percent increase expected by economists polled by Thomson Reuters. The report was the best showing since November.

The mixed trading Friday followed steep gains Thursday on a promise by European leaders to help Greece. However, there are few details about any rescue. EU leaders are scheduled to meet again next week.

Some analysts had expected Beijing policymakers to raise bank reserve requirements in the second quarter. The earlier move may have been spurred by reports of stronger-than-expected Chinese exports and robust lending in January.

China's surging economy can be seen in rising home prices, reminiscent of the U.S. housing bubble a few years ago.

In Beijing, developers can barely keep pace with demand as the amount of residential floor space sold in 2009 skyrocketed 82 percent from the year before.

The Associated Press contributed to this report.