Fool's Mountain: Blogging for China

The urban myths around China’s property bubble are as compelling as they are odd. There are tales of office blocks, towering in Shanghai, Beijing and a dozen other provincial cities, behind whose mirrored-glass exteriors is a ghostly silence. There’s the story the cycling professor noting a complete absence of lights in ranks of buildings, during the most recent solar eclipse in Beijing. Of taxi drivers who ply their trade, whilst nailing down million-dollar property deals on the phone. Of couples divorcing, so they can claim an extra share of the property bonanza. Even allegations of 60 million homes mysteriously having no electricity charges for more than 6 months.

After two decades of frenetic building activity, people are starting to wonder when, and whether, all of that concrete and glass is going to be put to real use. And there is more than just talk and whispers going on here. There are plenty of numbers to back up the speculation. Much of the 10% per year growth that China has seen is directed into cement and girder – some 25% in 2009. That same year saw growth in residential property prices of 50% in Beijing, and 60% in Shanghai.

It now takes an average Chinese worker 18 years to pay for their average abode in Shenzen, and 22 years in Beijing. That compares to less than 8 years in the US. So the fact that property prices are running fast is beyond dispute. The question on the lips of everyone, from foreign investors to Chinese government officials is less “Is there a bubble”,  and more, “When will it burst?” Unless it can be gently deflated, and China’s growth shifted to a more balanced pattern in the process. That’s what the government hope.

The Chinese government has shown it takes the possibility of a burst property bubble very seriously. A number of measure to cool down the feverish market have been taken over the last year. They’ve raised the minimum down-payment on second homes to 60%, interest rates have been gently nudged higher, and non-Chinese are more restricted from buying property than they were. Mortgage discounts for first-time buyers were removed, and estate sales taxes introduced.

Officials have even announced a massive 1.3 trillion yuan scheme to build ten million cheap apartments for low paid workers, who have found the recent price hikes making accommodation unaffordable for them. The government lays the blame on speculators pushing prices up unnecessarily, whilst quietly ignoring their own contribution to blowing up the bubble. And the fact that the government is building millions of apartments, even as there are strong suspicions of millions of flats left vacant in ghost cities, shows something is badly disconnected with the property market.

All actions of the actions taken so far can be seen as those of a nervous government. The Communist leadership knows that, with so much of the its ‘growth miracle’, and the Chinese citizen’s sense of financial well-being, tied up in property, a crash would hurt a lot of people. And a lot of unhappy people is not something the Chinese government is keen to see on their streets right now.

Their measures do appear to be having some effect. In those places with new property taxes, Chongqing and Shanghai, prices rose 0.4 percent and 0.9 percent respectively in the last month. That’s still fast, but a slower rate than last year. Beijing saw price rises slow too, at 0.4 percent, with an annual rate of growth down to a more reasonable 6.8 percent. So does this indicate that China can assure a soft landing, from the property speculation leap of the last couple of years?

Maybe. But the problem isn’t so much with the fundamentals of the market. It’s in the psychology of the market at many different levels. Many of those who’ve bought property see it as a rock-solid investment for the future – mainly because there are so few other outlets to place rising incomes into.

Then there are local governments, who have seen land taxes from development and property deals as a fabulous source of revenue for them. That makes them want to squeeze every last drop out of the market. And even manufacturing concerns and government enterprises have jumped onto the property bandwagon – they have real-estate divisions that they now see as major sources for printing money.

In short, the property bug has bitten deeply into the Chinese psyche – and a market that is relying on a ‘state-of-mind’ to keep it going can reverse very quickly. The popping of China’s property bubble may reverberate very loudly around the world indeed.

Edward Khoo is a Malaysian Chinese who is proud of his language and based in one of the exotic and tropical islands of Malaysia.