Hypselotimophobia, or the fear of high prices – obscure word – but probably a good proxy to describe the reaction of the Chinese government when it acted to rein in its real estate sector. China’s urban property prices, which reportedly rose 7.8% in December – the fastest pace in over a year – is on a boil again.

Due to the sizzling 8.7% expansion of the Chinese economy last year, stock markets worldwide finished the month of January in a downtrend – spooked by the possibility that policies to cool the economy could actually put the brakes on a recovery.

Bubbles Spell Trouble

When an asset bubble unravels through market forces, the result is necessarily chaotic and engenders systemic risks. Fresh from memories of the subprime debacle in the US, the world is looking hard at the Chinese economy for signs of rampant overheating.

Data from the National Bureau of Statistics showed that last year’s property boom resulted in real estate investments topping Rmb3t, up 16.1% from 2008. Of the estimated Rmb9.5t increase in lending, the property sector accounted for more than a fifth of the loans granted, Wang Zhaoxing, Vice Chairman of the China Banking Regulatory Commission, said at a press briefing in mid-January.

But reining in property speculation is a precarious affair. The property sector is a major growth driver of the country, and like the automobile industry, is one of China’s main economic pillars. Investments in the sector also fuels growth in the cement, steel and home appliances industries, as well as the financial sector.

However, this is not the first time that the Chinese is grappling with spiraling prices. Two years ago, euphoria over the Beijing Olympics ignited a construction boom that sparked off the same fears. While measures instituted then included little more than verbal suasion, the government seems to be more serious about its intentions this time round.

With concerns that the economy could have overdosed on its Rmb4t stimulus package, the government announced in December that it will operate under four wide-ranging directions to fix the property market – structural adjustment, speculation suppression, risk control and clarifying responsibility – which are relatively more specific, systematic and detailed than its previous measures.

With Bubbles, Work’s Never Done

Still, all these might not be adequate in the face of a buoyant market. Property developers from the Mainland, bullish on prospects, are venturing into the US IPO market to raise funds. IFM Investments, which sells real estate under the Century 21 brand in China, was the second real estate firm to peddle its shares in the US in three months.

Faced with migration and rising incomes, home prices, especially in the major cities, have no way to go but up. Despite the slew of recent measures undertaken, short of an increase in interest rates, Beijing’s monetary policies are still widely considered loose.

Unfortunately, bubbles and capitalism do go hand in hand. Although China’s economy differs substantially from US and Japan’s, with easy credit and expectations of the rising value of non-monetary assets, any rational investor will act to channel funds to where returns are highest – or what Keynes called the speculative demand for money.

And the reality is that even if the Chinese government managed to deflate the real estate bubble (real or perceived) this time round – a resurgent economy, poised to overtake Japan as the second largest contributor to world GDP – it probably would not take long before the bears are out in force to forecast another round of bubble trouble.