ST : Bubble about to burst or yet to fulfil potential?

Apr 11, 2010

NEWS ANALYSIS

Bubble about to burst or yet to fulfil potential?

By Grace Ng

Beijing: Is there really a bubble forming in the China property market? For most ordinary Chinese like Beijing cab driver Zhang Jing, 45, the answer is all too obvious.

'Prices in prime areas of Beijing have been rising by 50 per cent to 100 per cent in the past year. If that is not a bubble, what is?' he demanded.

Mr Zhang's view echoes recent warnings by financial gurus such as well-known fund manager Jim Chanos and Harvard University professor Kenneth Rogoff: China's economy is dangerously overheated, driven by a state-funded investment boom and a record 9.6 trillion yuan (S$2 trillion) of loans last year.

Beijing itself has acknowledged that it needs to curb what Premier Wen Jiabao recently called a 'precipitous rise in prices in some cities'. He has pledged more measures to curb speculation and signalled tighter lending to the property sector.

But opinion is still divided on whether China's red-hot property market is a bubble waiting to burst - or a rising star with more room for growth.

Average prices across 70 cities surged 10.7 per cent in February, up from January's 9.5 per cent rise. It was the fastest pace in almost two years. Some analysts reckon that property prices are already more than 10 times the average income.

Irrational fears, speculators and easy credit raise the risk that a sudden drop in investor confidence may trigger a massive sell-out in property and cause the market to crash.

This scenario sounds eerily similar to Japan's property bubble in the 1980s, when the land price index tripled in five years amid a property craze, points out University of Tokyo professor Takatoshi Ito in a recent commentary.

When prices started to drop, the mountain of bad debt and defaults by borrowers precipitated a crash and the market stayed moribund for almost a decade afterwards.

Others disagree that China is headed that way.

Professor Tian Guoqing of Shanghai University of Finance and Economics noted that China needs to build a lot more infrastructure and houses to accommodate the migration of hundreds of millions of rural Chinese to the cities.

'We can expect the Chinese economy to grow at 8 per cent or more for years to come,' he noted in a recent talk. 'So average incomes have a lot more room to grow, which will provide fundamental support for growth in housing demand and prices.'

Besides, the Chinese government has an incentive to prevent a crash of the property market, a major driving force behind economic growth and key industries such as cement, steel, cars and furniture.

But even if the housing bubble can be sustained for many more years, it will eventually run out of steam.

'Many of the Chinese home buyers now borrow from their parents just to foot the down payment and have a huge debt for the rest of their lives. But who can the next generation borrow from?' said Dr Zhou Qingjie of the Beijing Technology Business University.

For now, however, there is a more pressing question: Will Beijing bite the bullet and allow interest rate hikes and the yuan to appreciate?

This is the best policy for China to ensure that it avoids a massive crash like Japan's in the 1980s, according to Prof Ito. It will help to cool down the overheated Chinese economy.

But it is not the government's skill in the fine art of monetary policy fine-tuning that convinces cab driver Zhang that there is no crash in view.

'The government knows there is too much at stake if prices crash: greedy officials have many properties, social unrest may rise, economic growth may drop. The bubble will go on,'said Mr Zhang.