First, as UBS China economics head Tao Wang has continually emphasized, there is no real evidence of a structural bubble in Chinese housing. Prices have been relatively well-behaved, as we saw above. There has certainly been an upward trend in the physical volume of housing construction as a share of the economy over most the past decade, but not an unreasonable one given the magnitude of reforms that opened up private housing market in the late 1990s. And crucially, overall mainland leverage ratios barely rose between 2000-08, and actually fell from 2004 onwards.

However, the problem comes when we look at the last 12 months. Housing prices have started to rise at a pace faster than incomes. Physical construction and sales volumes skyrocketed over the course of 2009, by much more than could be explained from a post-2008 "rebound" alone (Chart 7 above). And for the first time in many years the credit/GDP ratio jumped tremendously, to record heights (Chart 8).

In short, all of the warning flags that normally point to trouble ahead - to some extent prices, but especially volumes and leverage - have suddenly appeared.

Does this mean that China is now threatened with a pending structural collapse? Well, no; once again, using the historical experience from the Asian crisis countries in Charts 4 and 5 above or the more recent stories in the US, UK and Eastern Europe, the "normal" length of a bubble cycle with excessive leverage and overblown construction and real estate activity would be at least four to five years before things fell apart - i.e., by this
metric it's still early days in China, and there is plenty of time for the authorities to step in and cool things down.

The bad news, though, as Tao also stresses, is that the process of tightening monetary policy almost inevitably means a sharp y/y slowdown in property and construction, given how inordinately fast the numbers have run in the second half of last year. And this means that a lot of "big China bears" - although very wrong on the structural call in our view - could appear very right for a few quarters as momentum drops off. So please keep a close eye on this space.

Eoin Treacy's view The Chinese government has a sound record of identifying developing bubbles and popping them before they cause systemic risk to the economy. This common sense approach to economic governance is rather at odds with the policy followed by Alan Greenspan when he was Fed chairman. Let us hope Western monetary authorities are humble enough to learn from so called emerging economies.

Efforts are already underway to cool the Chinese housing market and rising interest rates are also likely to feature in this policy response before too long. While this will probably create a headwind for the stock market, it also mitigates the risk of a systemic blowout in a few years time and is to be welcomed.