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Will China heed the inflation hawks?

Rising property prices are setting off alarm bells in China.

An academic economist who advises China’s central bank told the Financial Times that the country’s housing bubble is, believe it or not, much worse than the ones that wreaked havoc on the United States starting three years ago.

Bubble trouble?

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the U.S. and U.K. before your financial crisis,” the economist, Li Daokui, said.

Evidence that China is in the midst of a property bubble has been accumulating. According to one estimate, the ratio of house prices to household incomes is three times as large in China as in the United States. The same research shows a widening gap between sales prices and rental costs — which was a harbinger of the mid-decade housing bust here.

That’s not to say that the Chinese housing markets are without their shameless boosters. But one salutary effect of the U.S. housing bust is that it reminded people that prices don’t rise forever.

The question now is whether policymakers at the People’s Bank of China will take note.

The bank has shown it is aware of the risk of a housing bubble by raising bank reserve requirements in a bid to slow lending. And Li’s hawkish stance was well known before he and two other academics were named to the bank’s monetary policy committee this spring, so presumably his words will carry some weight.

This should prevent a replay of the farce in which the likes of Alan Greenspan and Ben Bernanke claimed either that U.S. house prices weren’t in a bubble or that there was nothing they could do in any case.

Bernanke was still upholding this proud tradition as recently as January when he said in a speech that Fed policy during housing bubble “does not appear to have been inappropriate, given the state of the economy and policymakers’ medium-term objectives.”

Still, even if China doesn’t share the Fed’s penchant for denial, how likely is it that the Chinese will squash their housing bubble?

This is not the easiest time to be tinkering with the workings of the economy, with Europe on the verge of crisis and a wave of free money obscuring the true state of the recovery. Despite hopes for a global rebound, the Shanghai Composite stock index is down 21% this year.

Beyond that, just getting the timing right is no simple matter, as Li himself noted this spring.

“As to monetary policies, if the bank continues to provide easy loans, inflation may occur,” he told Xinhua. “But if the government tightens monetary policies too soon, the economy may relapse into recession.”