The Chinese Miracle cannot Escape the law of gravity -- Real estate
markets across China join general slump

-- Micky's HO: What goes up, have to come down. --

Real estate markets across China join general slump

By Keith Bradsher
Wednesday, September 10, 2008

GUANGZHOU, China: The United States, Britain, Spain and other countries
suffering from real estate market downturns now have fresh company: China.

Starting here in southeastern China and now spreading north and west
across the country, the number of homes changing hands has dropped
precipitously. Faced with few buyers, sellers are starting to cut their
prices for residential and commercial real estate.

Brokers describe price decreases of as little as 4 percent over the past
year in Harbin in northeastern China, for example. But the volume of
transactions there has plunged by two-thirds.

In some areas of southeastern China, where the number of transactions
began falling earlier, prices have dropped by 10 percent to 40 percent.

"People are thinking more carefully and taking much longer before they
decide to buy or not to buy property - the environment is more difficult
these days," said Hwang Sha, a real estate broker in Xiamen in
east-central China.

China's real estate downturn is occurring as exports are also slowing
sharply when adjusted for inflation and calculated in yuan.

China's accumulating economic problems pose a challenge for the United
States and the European Union. Worried about job losses, China pushed
down the value of the yuan slightly against the dollar last month for
the first time in 26 months, a step that would make Chinese exports more
competitive at the risk of raising trade tensions with Washington and
Brussels.

This downturn in property has led to what economists describe as a
broader deceleration in China's rate of economic growth, although at
nearly 10 percent it remains higher than in most countries. Fresh
evidence of that economic slowdown emerged on Wednesday in a series of
monthly economic statistics released by the Chinese government.

Growth slowed in imports and fixed-asset investments. Inflation dropped
sharply at the consumer level, to 4.9 percent in August from 6.3 percent
in July.

Weaknesses in China's real estate market do not yet appear to pose a
threat to the financial system as severe as the problems unfolding in
the United States. Chinese banks require down payments on mortgages of
at least 30 percent, providing an ample cushion against losses.
Foreclosures are rare. Many in China still pay cash for their homes,
particularly in rural areas.

Leo Wah, a Chinese banking analyst for Moody's, said that Chinese banks
could weather the current decline in real estate prices, but he
cautioned that banks could face more challenges if economic troubles
become more widespread. "We do not believe that it would cause a serious
problem, but if property prices fall some more, it won't be the only
sector that has problems," he said.

Real estate difficulties pose a dilemma for China's leaders because they
coincide with a two-thirds drop in share prices on the Shanghai stock
market since the market's high last October.

The most recent national data from the government show that the average
price for all residential and commercial real estate was 7 percent
higher in July than a year earlier. But real estate brokers across China
say that within that period, prices peaked in various markets either at
the end of last year or at various times this year, and are now sliding
in many cities.

The stocks of real estate developers have plunged. China Vanke, the
country's biggest publicly traded developer, reported Tuesday that its
revenue had plummeted 35 percent in August from a year earlier.

Perhaps most serious is the emerging view, apparent on blogs and in
interviews, that houses, like shares on the plummeting Shanghai stock
market, are no longer a certain path to prosperity.

Lin Bin, a 48-year-old insurance saleswoman who lives here in Guangzhou,
said she was still ahead on the 1,000-square-foot, or 93-square-meter,
three-bedroom apartment she bought here in 2002. But she has lost
two-thirds of the $4,400 she put into the stock market a year ago and
worries that the housing market may be next.

"I'm not contemplating buying a second home as an investment because I
hear that stock market and housing prices will continue to fall through
next year," she said.

Part of the problem is a severe credit crunch. Through last spring,
China's central bank repeatedly ratcheted up its requirements that
Chinese commercial banks must deposit more reserves with it. The goal
was to slow bank lending and control inflation.

The commercial banks have responded by continuing to lend to big
corporate customers, most of them state-owned or at least
state-controlled, while cutting back on other lending.

Central bank data show that total loans to households fell by a third
from March to July this year. The bulk of these loans are mortgages,
because Chinese car buyers continue to use mostly cash while personal
loans are rare.

"It's collapsing, it's unbelievable, and most of it is from mortgages -
I don't see how the housing sector is going at all," said Nicholas
Lardy, a specialist in Chinese finance at the Peterson Institute for
International Economics.

He added that the decline was so precipitous that it had to reflect
weaker demand for housing, and not just regulatory restrictions on credit.

Increasing lending may be difficult now, and not just because of
lackluster public interest in real estate. The central bank needs ever
more reserves from commercial banks to buy dollars and prevent China's
currency from rising against the U.S. dollar, so as to keep China's
exports from slowing further.

The central bank spent one-seventh of China's entire economic output in
the first half of this year to buy foreign currency.

China's trade surplus set a record of $28.7 billion in August, the
government announced Wednesday. This was mainly because of an unexpected
slowdown in the growth rate for imports. Slower growth of imports is a
common sign of a weakening economy.

Assessing national trends in Chinese real estate is often difficult
because of long lags in the data. The government releases annual data
only for the value of all real estate sold or leased across the nation,
while monthly data on prices come out with long delays. That makes it
hard to pinpoint when the pace of transactions begins to slow, or the
current level of prices.

Real estate brokers say that prices are generally holding up better for
residential property in prime locations than in outlying areas, and that
top-quality commercial buildings are faring better than older buildings.

Real estate difficulties are starting to affect the construction
industry, although the skylines of Chinese cities remain dotted with cranes.

Ralph Gerson, the executive vice president of Guardian Industries, one
of the world's largest glass-making companies, said that demand was
rising less rapidly in China for the company's high-technology insulated
glass for modern office buildings.

"It used to be booming, and now it's growing at a slower pace," he said.

Cities deep in China's interior appear to be the least affected by the
current difficulties. Dan Yian, a real estate agent in Chongqing, said
that the volume of housing transactions there had slowed by 20 percent
to 30 percent so far this year. But prices have not yet fallen from a
stable level of $730 a square meter, which works out to nearly $66,000
for a typical apartment of 90 square meters.

Export-dependent coastal cities in mainland China have had the steepest
downturns in their real estate markets. Some of these problems are
starting to have ripples in other Asian markets.

Freddy Wu, the chief executive of Hong Kong Property Services, said that
his real estate agency had seen mainland investors default in recent
months on a tenth of their purchases of Hong Kong apartments, forfeiting
down payments.

"A lot of investors from China have their cash tied up in the mainland
stock market and in mainland real estate, so they would rather take a
loss now," instead of being required to sell mainland investments at a
loss to come up with the cash to complete purchases in Hong Kong, he said.

Hilda Wang contributed reporting from Guangzhou.