China's Real Estate Bubble

8/3/2019 China's Real Estate Bubble

1/4

Chinas Real Estate Bubble

Is it the turn of China after the recent crack down of USA housing bubble? China is the worldssecond largest economy with a $4.909 Trillion or 7.92% of the world economy and realty is

contributing a lions share of 10% to it. With the USA sub-prime crisis, the world has not yet come

out of shocks and now China leading towards the housing boom. China government is supporting

the realty with its aggressive policies in making the realty a big boom to contribute toward its

GDP. Does the government right enough to loosen the monetary and fiscal policies against realty

to reach the double digit growth?

Government is intending the growth in GDP by massive urbanization all around the country and

realty sector is playing a vital role in delivering the attentive results. Communist Party's clear

expression of this view came in no. 1 document in January, a policy blueprint for 2010. In it, Chinavowed to reform the hukou system by giving rural citizens the right to the same services as

urbanites, but only if they move to small cities within their own province. Chinese law says

farmland is collectively owned by villages. In reality, the land is controlled by local governments.

They, not the farmers, have the power to decide who can turn fields into real estate. Farmers say

land reclamation rules are fixed against them, giving officials and well-connected developers the

power to push them off the land without fair compensation. In some cases, local governments,

which earned more than $230 billion from land auctions in 2009, are also being accused of

demolishing old neighborhoods and unfairly compensating residents. In a recent poll conducted by

China Youth Daily, a state-run newspaper, more than 80 percent of the respondents said local

governments were a major driving force behind the skyrocketing property prices.

By 2025, the country will have 221 cities with population of a million or more, compared to 35 in

Europe, according to a report by McKinsey & Co, the consultancy firm. China had 108 of such

cities in 2004. The sheer numbers involved in China's urbanization are staggering. To

accommodate the on rush of new city dwellers, the country will have to pave 5 billion square

meters of road, construct 5 million buildings, including 50,000 skyscrapers, and add up to 170 mass

transit systems, all this by 2025. The McKinsey report said.

In the mission of urbanization by transforming dusty towns and villages into aspiring cities that

will toll on the economy and society over a time, they are leaving behind the worrisome levels ofdebt piling. In such haste, quality of the work has got hampered; less thought has been given to

energy efficiency and economic requirements of the common man. This has happened so quickly

that the cities have not had an opportunity to grow organically. Urbanization is an inevitable

trend. It's not whether you want it or not. There's no choice. But this urbanization path is a

deformed bubble. As per Mr.Jiao Nanbo, secretary-general of the House Inspector Management

Association of China, A large number of villas and townhomes inspected in Beijing have

construction defects and some flaws could even endanger lives. Compared with Beijing's


2/4

apartments, even though all of them had quality problems, villas and townhomes have many more

construction defects and their quality is very poor.

One interesting fact is that most of these realty projects are taken up by the state-owned

companies, which are ultimately controlled by the central government. These are the companies

which are working for the central government to keep the real estate boom in achieving the

intended GDP growth. These are bidding up prices on sprawling lands for big real estate projects.

Land records show that 82 percent of land auctions in Beijing this year have been won by big state-

owned companies outbidding private developers, up from 59 percent in 2008. A recent study by

the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing

had jumped by about 750 percent since 2003 and that half of that gain came in the last two years.

Housing prices have also skyrocketed, doubling in many cities over the last few years.

The report pegged a big part of the increase to state-owned enterprises that have paid 27 percent

more than other bidders for an otherwise equivalent piece of land. Critics say the central

government in Beijing unwittingly propelled the land frenzy by pushing a huge $586 billion

economic stimulus package last year and encouraging state-owned banks to lend more

aggressively.

Chinese finances are in good health, at least in official terms. The government says its total debt is

just 20 percent of gross domestic product, compared with about 80 percent in the United States and

nearly 200 percent in Japan. But officials acknowledge the picture is grimmer when local

government debt loads are added.

Last year, state banks made a record $1.4 trillion in loans, nearly twice as much as the year before.

Analysts now say they believe much of that money was diverted into the property market through

off-balance-sheet maneuvers, leading to the record land bids and soaring property prices. That

belief is adding to concerns that some of Chinas biggest state-owned banks may be sitting on

enormous unreported debt.

Though legally barred from borrowing, provinces and cities have found ways around the

restrictions, often through government-backed investment firms. These financing vehicles haveborrowed a total of 7.7 trillion Yuan ($1.1 trillion) from banks, according to the China Banking

Regulatory Commission. That alone would about double the national debt. Realizing the potential

scope of the problem, the regulator warned banks at the start of this year to limit their lending to

local governments.

This increased investments and government backed policies have lured foreign investors also into

the Chinese realty sector. According to international real estate advisor CB Richard Ellis, the value

of en bloc property transactions in 15 Chinese cities has hit 49.9 billion Yuan ($7.36 billion) in the

first-half of this year, among which 19.4 billion Yuan came from foreign institutional investors,


3/4

10.2 billion Yuan from Hong Kong, Taiwan and Macao, and the remaining 20.3 billion Yuan from

mainland investors.

The path of urbanization is not good, and it will lead to a social turmoil, by grabbing the lands from

farmers with out proper compensation. Any sector runs on the demand supply economics. Since,

the government is backing the realty strongly with its much aggressive policies for building huge

number of houses; this path will lead to speculative profits by speculators and piles up the housing

loans in the financial institutions. Once there is a huge supply in the housing sector with

skyrocketed prices; the sector will crack down and will hamper the growth path of China. The

global economy will also be propelled to feel the pressure due to high end involvement and

investments in the sector.

Now the Chinese government is feeling the heat of speculations and skyrocketed prices bycompromising on the quality of houses. Government has started taking actions by implementing

tougher policies and tightening the money supply into the system. According to the latest edition

of a central bank publication China Finance, Chinese house prices face very large pressure to fall in

the second half on weakening demand and increasing supply. Some of the recent policy actions

taken by the government are as follows:

78 State-owned enterprises with no core businesses in the real estate industry are asked to

withdraw from the industry after completing unfinished land development

programs. Regulator: SASAC dated 18th Mar 2010.

Higher down payments and mortgage rates if one of the home-buyer's family members

already owns property. Regulators: Peoples Bank of China & China Banking Regulatory

Commission dated 4th Jun 2010;

Beijing banned all families from buying more than one home; it also bans mortgages for

purchases of a third or third-plus home. Regulator: Beijing Government dated 30th Apr

2010;

The central bank announced it will raise the deposit reserve requirement ratio (RRR) for

financial institutions by half a percentage point from May 10. Regulator: Peoples Bank of

China dated 2nd May 2010;

Developers were asked not to take deposits for sales of uncompleted apartments withoutproper approval and barred from charging "abnormally high" prices. Regulator: MOHURD

dated 19th Apr 2010.

With the recent intervention of Government in curbing the speculations and housing bubble, the

markets will see a correction in the housing prices in second half of the year. The government

should take a deep dive into the sector and have constant eye on it, to mitigate a bubble in the

sector. So far, there has been only a mild correction in the property sector in response to the

tightening campaign, and Beijing has indicated that it is determined to keep its foot down until


4/4

prices drop to a more reasonable level. The issue is of particular concern because economic growth

is the Communist Party's main tool for ensuring stability and legitimizing its rule.

Author: Murali Kashyap

Helsinki, Finland

[email protected]

Sources of information:

Chinas real estate curbs (www.chinadaily.com)

Reuters (uk.reuters.com)

Economic times (economictimes.indiatimes.com)

Phayul (phayul.com)China-Window (www.china-window.com)

Documents

China's Real Estate Bubble