When will China’s property bubble burst?

When will China’s property bubble burst?

Tuesday, 6 September 2011.

chinaworker.info

China, the world’s second largest economy, is increasingly driven by real estate spending which has formed a massive speculative bubble. This has led to the building of entire “ghost cities” that are nearly, if not completely, unoccupied. Up to 64 million Chinese apartments are vacant, according to some estimates. This is a totally crazy development and one that is fuelling enormous anger and discontent, as graphically revealed in the following televised report, China’s Ghost Cities and Malls, by Australia’s SBS Dateline. This film was shown at the recent CWI (Committee for a Workers’ International) Summer School during the commission on China.

Feverish speculation has led housing prices across the country to surge an estimated 140 percent since 2007. House prices in Beijing have risen as much as 800 percent in the past eight years. This prompted the central government to impose a raft of restrictions on the banking and property sectors early last year, but so far with little effect. Investment in housing has surged 36.4 percent in the first seven months of this year.

China’s banks, although owned by the state, have invented an array of measures to get around the tighter government rules, which if followed would massively cut bank profits. These new innovations include an explosion of so-called ‘entrusted loans’ – where banks act as middle-men between cash-starved small and medium enterprises (SME) and cash-rich state-owned companies. These privately owned companies account for 70 percent of total employment and 60 percent of China’s gross domestic product. The banks collect a handsome fee for arranging entrusted loans, without using their own capital, which therefore does not breach government lending limits.

These loans are at usurious annualized interest rates of between 36% and 60% compared to the government benchmark interest rate of 6.56 percent. The banks have another motive, which is to keep indebted SMEs afloat; without new loans, even at such punitive rates of interest, many of these companies would go bust. Their plight today is “even worse than in 2008” when the global financial crisis began, according to the All China Federation of Industry and Commerce. More than 7,300 companies in Zhejiang province were forced out of business from January to April this year due to the central government’s monetary tightening measures, according to People’s Daily newspaper.

Another growth area is the underground banking system, completely outside government regulation, which accounts for a much bigger share of total loans this year. About 80 percent of the SMEs in Zhejiang province are using underground banking loans to fund their businesses, even though the black market interest rates in the province have surged as high as 10 percent monthly, according to Cai Hua, a spokesman of the Zheshang Research Association. The growth of these underground ‘black banks’ is also attracting depositors, with middle-class savers choosing to place money with them in order to realise higher interest at more than double the rates offered by state-owned banks.

A new and gloomy report by credit rating agency Fitch warns that China’s property sector affects “almost every aspect of the economy” and not only poses default risks to the banks but also other borrowers who speculate in property. Fitch and other commentators cast doubt on government claims that the banks can withstand a severe fall in property prices of even 50 percent. This was the verdict of questionable ‘stress tests’ conducted by the China Banking Regulatory Commission some months ago. But the stress tests failed to take account of the chain reaction brought on by a slump in demand for steel, cement and other building materials and equipment. It is estimated that 70 percent of China’s steel demand goes to the construction sector.

When will this bubble burst? It is impossible to predict the timing with any accuracy. But clearly, it will burst at some point and the effects upon the Chinese and world economy will be extremely serious.