China’s gleaming new cities: when will the bubble burst?

In the past 15 years, house prices in the world’s second-biggest economy have ballooned

The Oriental Pearl TV Tower in Shanghai, China. Photograph: ChinaFotoPress/Getty Images

The Oriental Pearl TV Tower in Shanghai, China. Photograph: ChinaFotoPress/Getty Images

 

On a recent study tour of Beijing by the MBA class at the Michael Smurfit Graduate Business School in UCD, the question everyone had to ask after a few days of touring China’s gleaming new cities was: “When will the bubble burst?”

In the past 15 years, house prices in the world’s second biggest economy have ballooned and China has stepped up its efforts to cool the property market, implementing measures in key cities in response to fears that the country’s property bubble will finally pop this year.

Just as in Ireland a few years ago, analysts are divided on what will happen, although, as a single-party state ruled by the Communist Party, China is in an unusual position when it comes to implementing measures to cool the economy.

Between 1998 – when property ownership started to move into private hands – and 2011, property prices across China have risen 160 per cent.

Should this bubble go pop suddenly, the wider implications are significant, spreading to the Chinese banking sector. Concerns linger about the broader significance of exposure to shadow banking, unregulated credit offered by non-bank lenders.

Gillem Tulloch, founder and managing director of Forensic Asia, said in an interview with Reuters last month: “I’ve never come across a government that’s managed to deflate a bubble gradually. What will likely happen is that confidence will suddenly go and that, yes, the bubble will pop.

“We do think the bubble will pop in the second half of the year once they stop injecting ridiculous amounts of credit into the economy.”


Crackdown on prices
The Chinese government has regularly, and steadily, implemented a host of cooling measures.

Beijing, Shanghai, Chongqing, Shenzhen and Guangzhou are the cities that will lead the central government crackdown on the overheated property market.

Local authorities need to enforce strictly a 20 per cent capital gains tax and higher down-payments for second-home buyers in areas where property prices are rising too quickly.

Under the new measures, single residents in Beijing will be prohibited from buying second homes, while Shanghai’s municipal government said, in addition to enforcing the capital gains tax, it would apply greater scrutiny to borrowers who come from other cities, are foreign or divorced.

The central bank has raised down-payment requirements for second mortgages in cities with excessive price gains and tightened home-purchase limits in cities with major price pressures.

A number of high-profile defaults of wealth management products have prompted fears of a risk to China’s financial system and economy from the rapid growth of shadow banking in recent years.

According to estimates by the rating agency Standard & Poor’s, shadow banking accounted for 22.9 trillion yuan (€2.86 trillion) of credit in China at the end of last year, which is equivalent to 34 per cent of the total loans in the banking sector and represented 44 per cent of China's GDP last year.

“We believe major Chinese banks’ capitalisation, earnings and liquidity profiles provide a comfortable buffer to absorb any possible hit from shadow banking and credit risks in the wider Chinese economy,” Standard & Poor’s credit analyst Ryan Tsang said in a recent report.

“We view China’s shadow banking more as a symptom than a cause of some emerging systemic risks to the banking sector and the wider economy,” he said.

Last month, the China banking regulatory commission put a cap on the amount of wealth management products invested in “non-standard” assets – in other words those not traded on markets – to 35 per cent of total wealth management products issued by banks and 4 per cent of banks’ total assets.

The banks were also instructed to improve documentation and transparency about wealth management products and underlying assets and projects.

There is still a need to address the broader issue of pent-up demand among China’s savers to improve on the low returns on offer from bank deposits.

Rental yields in large cities are very low and have been falling steadily since 2008.

Since 1992, more than 12 billion square metres of urban housing has been completed, of which almost seven billion are so-called commodity homes.

Louis Kuijs, the chief China economist at the Royal Bank of Scotland, told the China Daily he believes a disastrous systemic financial collapse is unlikely.

“China’s banking system is less leveraged and better and easier funded than the systems in the crisis countries, making it in better shape to absorb shocks such as asset price fluctuations.”