China Property Market ‘Bubble’ Set to Burst, Xie Says

Feb. 2 (Bloomberg) — China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie. As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today.

Tougher property policies may lower 2010 sales volumes 10 percent, compared with an earlier forecast for growth of as much as 5 percent, BNP Paribas said in a report today. The Shanghai Composite Index has slid 10 percent this year, the worst performer among the 94 global gauges tracked by Bloomberg, on concern that China will add further lending curbs. The index dropped 0.2 percent to 2,934.71 today. Shanghai Mayor Han Zheng said Jan. 31 property prices are “too high,” undermining sustainable development of the nation’s commercial hub. Asset bubbles are the “real worry” as China emerges from the global financial crisis into a “boom time,” central bank advisor Fan Gang said in Beijing yesterday. Residential and commercial property prices in 70 Chinese cities rose 7.8 percent in December from a year earlier, the fastest pace in 18 months, the National Development and Reform Commission said. China’s economy expanded 10.7 percent in the fourth quarter, as the government’s 4 trillion yuan stimulus package and a record 9.59 trillion yuan of new loans last year fueled the fastest growth in two years.

Speculation

The government last month raised the amount of money banks are required to keep as reserves and re-imposed a sales tax on homes sold within five years of their purchase. Premier Wen Jiabao pledged in December to stabilize property prices, crack down on speculation and keep housing affordable. The government told banks to raise interest rates on third mortgages and demand bigger down-payments, a person with knowledge of the matter said. The China Banking Regulatory Commission warned lenders of the risks from “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults are rising, the person said, without giving figures. “We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie, who correctly predicted in April 2007 that China’s equities would tumble, said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.”

Vacant

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said. Shanghai Zendai Real Estate Co. agreed to pay 9.22 billion yuan ($1.35 billion) for a plot of land adjacent to the city’s riverside Bund area, according to the Shanghai Real Estate Trading Center. Zendai is paying 34,148 yuan per square meter for the lot, the highest per meter price paid for land in China this year, according to property Web site Soufun.com.

“Developers paying record prices for land might get trapped this year,” Xie said. Property prices will be “flat” this year, BNP Paribas analysts Trevor Cheung and Frank Chen said in their report.

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