ST : Red flags over China's hot property market

May 5, 2010

Red flags over China's hot property market

But Beijing is actively taking steps to prevent the economy from overheating

By Gabriel Chen

IS CHINA'S economy overheating and headed for a crash?

A growing number of experts are flagging this possibility, and the Chinese government has been actively moving to pre-empt any such calamity, amid double-digit economic growth.

For instance, the People's Bank of China has raised the reserve requirement ratio - the proportion of lenders' deposits that must be kept at the central bank - three times since the start of this year. This cuts the funds available for lending.

Down payment and mortgage rates for some home buyers have been hiked. New apartment purchases are now limited to one per family. And commercial banks have been asked to suspend third-home loans.

Analysts say these measures are a signal that Beijing is growing concerned. After all, it was the fallout from the United States real estate market crash that brought the world's largest economy to its knees and set off the global financial crisis.

In late December, Chinese Premier Wen Jiabao made a widely publicised comment that 'property prices have risen too quickly'.

Housing prices have risen further since then. While poor data makes it tough to be sure about trends, Chinese house prices in the big cities are generally up about 12 per cent compared to a year ago.

Dr Marc Faber, publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong that China's economy may crash within a year.

'The market is telling you that something is not quite right,' Dr Faber said. 'The Chinese economy is going to slow down regardless. It is more likely that we'll even have a crash some time in the next nine to 12 months.'

Dr Faber is not the only China bear out there. Former Morgan Stanley star economist Andy Xie has cautioned China's property market is a massive bubble. 'The longer the bubble lasts, the more damage it will do to the economy,' Mr Xie said last month.

But optimists counter that Chinese growth is broad-based enough to more than offset risks associated with the bursting of any asset bubbles that are forming in areas such as property.

Mr Joseph Tan, the Singapore-based chief economist for Asia at Credit Suisse Group, said China's growth has not depended only on the red-hot property sector.

Growth has also been driven by the solid recovery in exports, improvement in private consumption, as well as infrastructure and retail spending. 'Even if China's property market crashes - which I find it hard to accept - I don't see it shaving off more than three percentage points of China's GDP,' Mr Tan said.

Mr Thomas Kaegi, UBS director of wealth management research, said that in certain segments of the Chinese property market, there is cause for concern, where prices have run ahead of fundamentals. However, the run-up is mostly in major cities, and in certain property segments, he noted.

Chinese consumers as a whole, he reckons, are also not overstretched. 'If you look at affordability issue on a countrywide basis, incomes have risen more or less in line with property prices, so I fail to see the case for a countrywide property bubble in China,' he added.

Still, the measures taken by Beijing so far have impacted market sentiment. The Shanghai Composite dived 7.7 per cent last month, the biggest decline since January. It has slumped 13 per cent this year, the world's third-worst performer.

'Chinese markets are down because of policy tightening. Policymakers are pulling at regular intervals, and focusing on the property sector,' said Barclays Wealth Asia strategist Manpreet Gill.

So what next? Veteran investor Jim Rogers told The Straits Times the real estate bubble developed in China is going to pop, but it is unclear whether the economy winds up in a crash or a soft landing.

Others think that the best way to deflate the property bubble is through an interest rate hike.

Mr Xie has said China has to raise interest rates steadily if it wants to achieve a 'soft landing' from the property bubble - if possible, by 2 percentage points this year, another 3 percentage points next year, and more rate hikes in 2012.

gabrielc@sph.com.sg


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Optimists counter that Chinese growth is broad-based enough to more than offset risks associated with the bursting of any asset bubbles that are forming in areas such as property... Growth has also been driven by the solid recovery in exports, improvement in private consumption, as well as infrastructure and retail spending.