The cartoon character running off the edge of the cliff makes a useful metaphor for the psychology of overvalued markets. As long as Wile E. Coyote doesn’t realize there is no ground beneath his feet, he can keep running in midair. When he looks down, he plummets. Although the world of physical matter doesn’t behave this way, financial markets sometimes do. And it may be a helpful lens through which to view the situation now confronting China.
For a year and a half, Chinese authorities have been trying to reduce property prices, leverage, and the economy’s dependence on the real estate industry. As defaults and distress spread, from China Evergrande Group to Kaisa Group Holdings Ltd. and others, the first signs of a shift toward policy easing emerged last year. Officials injected money into the economy by reducing the amount lenders have to keep in reserve at the central bank, sought to encourage financially stronger developers to take over embattled rivals, and even trimmed interest rates. The question is whether authorities are still in command. Having been pushed off the cliff, are China’s property investors, like Wile E. Coyote, just starting to look down?
