Shake-Up Ahead As 5-Year China Property Boom Dies

Source : The Straits Times, Jan 21, 2008

Beijing seeks to prevent crippling price bubble that may spark unrest

GUANGZHOU - CHINA'S steps to cool a frenzied residential market are finally biting and look likely to usher in an industry shake-out that may see thousands of small-time developers forced out of business, leaving large listed operators sitting pretty.

Beijing wants to stave off the kind of price bubble and crash that fed the United States sub-prime crisis, flung South-east Asia into an economic meltdown in 1997 and depressed Japan in the early 1990s.

Bankruptcies, however, may flood banks with bad loans and end up sparking the social unrest that communist party chiefs dread.

After four months as a budding real estate agent, 24-year-old vet-turned-property agent Wu Qixin was protesting at his employer's gleaming headquarters in the southern city of Guangzhou. It had been three months since his first and last pay packet.

Chuanghui, one of China's biggest property agencies, said it closed more than half its 1,800 outlets since October, as a clampdown in bank loans prompted a sharp fall in home sales, especially in southern China.

Led by multi-millionaire developers often in their thirties, China's private property industry is barely a decade old, with mortgages only made widely available in 1997.

In the last five years, a surging economy fuelled a huge construction boom as farmers bought one-way bus tickets to cities and the urban middle class left crumbling houses for sparkling new flats.

Foreign funds run by the likes of Dutch financial group ING, Morgan Stanley and Deutsche Bank have also funnelled Western pension money into Chinese homebuilding.

With average home prices doubling since 2002 and high-end apartment prices rising much further, Beijing has tried, but mostly failed, to cool markets with curbs on supply and demand.

Because of China's immature market economy, however, the government often prefers edicts to market tools, often with clumsy results.

For example, authorities blocked building on farm land but backtracked because it cut land supply and drove up prices.

'The problem with heavy-handed market interference is it often leads to unintended consequences,' said Mr Peter Churchouse, manager of a property hedge fund for LIM Advisers.

Thousands of developers are likely to go bankrupt as bank loans dry up, which will please a government bent on slowing economic growth, he said, but a consequent drop in housing supply may stoke property prices rather than cool them.

A construction industry slowdown will also hurt consumption in the world's fourth-biggest economy that some economists hope will take up the slack from any US recession.

'It just takes a hiccup and non-performing loans will rise, just as banks are cleaning up balance sheets,' Mr Churchouse said.

However, unlike in the US, securitisation of mortgages and other loans is almost non-existent in China, so the impact of loan defaults will be limited, and property-related lending typically makes up less than 15 per cent of a bank's business.

Signs have emerged that the government's measures are hitting home. In November, property sales in Shenzhen ground to a near halt and other markets either slowed or fell.

However, many analysts believe housing demand will stay strong, as household disposable income grows at 20 per cent a year, and recommend investing in listed Chinese developers who can obtain cheap land by devouring small, cash-strapped rivals. -REUTERS