Is The Red Hot Chinese Property Market Cooling Down?

As property watchers the world over have their eyes glued to the US sub-prime rollercoaster, it seems that another big player is about to fall foul of overenthusiastic property speculation and dodgy lending habits. Faced with rampant inflation, skyrocketing property values, no-deposit loans and 400% stock market growth in 2 years, in order to tame the fiery Chinese property market, the government is pulling on every Communist brake it can find in order to enforce some discipline on its increasingly capitalist economy, which is seeing property values drop and vacancies of up to 40% in some new developments.

The government has tightened restrictions, alerted by the US crisis, but experts have accused officials of simply ‘tinkering at the edges’ of the problem, suggesting that they are walking headlong into a situation similar to the one that crippled Japan in the 1980s.

Interest rates in the country have been raised five times this year and the central bank has increased reserve requirements for commercial lenders eight-fold. Last month the central planning agency imposed a price freeze on cooking oil, electricity, water and other household essentials to try to stem inflation that had hit an 11-year high, in an effort to reduce inflation below 6%. Thanks to a big fall in the price of pork, China’s annual inflation fell from 6.5% in August to 6.2% in September.

However, experts are divided on whether the hardline methods taken by the Chinese government to cool the economy will be effective; some contend that pulling out every Communist stop in the book could have far reaching consequences affecting industries beyond the property markets, while others feel that the government should actually be doing more to balance the books by urgently shrinking private consumption as a percentage of gross domestic product. In a country whose growth has redefined the concept of ‘bullish market’, spending and investment have been unparalleled with citizens and investors alike reaping huge rewards in capital gains. How the government now deals with the increasingly unbalanced situation is crucial if a massive property price correction is to be avoided, especially in light of the fact that 80% of urban homes are owned by private citizens. The value of housing loans awarded in China stands at nearly $US450 billion ($503 billion) so far this year, a huge concern considering that banking laws are still being written and a credit rating system does not exist, enabling bad creditors to enter the market with impunity. Even though Chinese mortgages are not securitized as they are in the US, meaning that the risk is owned by the lender, banks in China are nonetheless the sole source of funding for the majority of Chinese businesses.

If the economy cools to the extent that people default on mortgage payments, bank lending will be restricted which will slow or even cripple wide scale economic growth, widely anticipated by experts to be a likely scenario; they see annual economic growth plunging from its current double digits to around 5%.

However, this cloud may have a silver lining: although the last thing the US market needs is a major adjustment in the value of the yuan, there have been rumblings from the Chinese government about the possibility of large scale sell offs of US bonds - a definite blessing in disguise for the US.