FACTS:

China is a large holder of US agency debt worth $447 billion USD -  2008 September  BLOOMBERG   & FINANCE ASIA

Nearly 85% Of TV Population Viewed the Olympic Games Games

At the end of 2005, China had 80 digital TV channels, and digital TV was available in nearly 40 million homes. This year the government held events promoting digital in eight cities, including Beijing and Shanghai, and SARFT hopes local broadcasters will begin rolling out digital cable in those cities by the end of this year, and to other cities and towns in the next couple of years. Source: China's State Administration of Radio, Film and TV; Daily Variety



Over one billion unique Chinese viewers watched some part of the Olympic Games on television between Aug. 8, the day of the opening ceremony, and Aug. 12. That's nearly 85% of China's total TV population. This number is based on the viewing of the main CCTV channels broadcasting the games. The average person spends 208 minutes per day watching television.
Source: CSM Media Research

 

MEDIA

 

China's economy is now tied more closely to the world. In 2007, China had surpassed the United States as the world's second largest merchandise exporter, and it is expected to replace Germany in 2009 to become the world's largest exporter.

Shanghai has been linked to New York, through Hong Kong. As of end-March 2008, among the top 10 Chinese companies measured by market cap in Shanghai, nine are dual-listed both in Shanghai and Hong Kong, compared with three at end of January 2006.

There is paradox in today's situation: China, the proverbial world factory is now heading to become the world largest market, while, its counterpart, the US, is turning from the world's largest market to the world's largest factory.  

Although the market has slowed somewhat, growth is still at 9%.   The country has foreign reserves of $1.9 trillion USD.

Investment in residential real estate comprises 10% of country's GDP, compared with 4.6% in the US.     Mortgage loans account for 12% of Chinese bank lending and loans to developers another 7%.  In the U.S., real estate-related loans accounted for more than 50% of lending by commercial banks, according to Standard Chartered.

China will exempt property transactions from stamp tax and value-added tax from November 1, 2008 for first-time buyers and for units under 970 sq ft.

Wary China to miss out on foreign banks' mega sale
Political concerns, lack of expertise and nationalistic worries among obstacles

China has the cash and ambition to be a major player in the world's biggest sale of financial assets in half a century, but politics, a lack of expertise and an aversion to risk will relegate it largely to the sidelines.

Nationalistic worries about how state-owned Chinese firms might behave if they had a controlling stake in a major foreign bank are probably Beijing's biggest obstacle, but there are others almost as daunting.

'Chinese financial institutions are not mature enough to make a large overseas acquisition,' said Zhao Xiao, an economics professor at the Beijing University of Science and Technology. 'They must gain experience helping China's thriving manufacturers to move overseas . . . and in five years they may be ready.'

China's cautious regulators are also reluctant to approve such acquisitions due to volatile markets, recent losses from earlier financial stakes and a lack of experience.

'The Chinese may have that ambition . . . but that would just not be allowed,' said Glenn Maguire, Hong Kong-based chief Asia economist for Societe Generale (SG).

'Politically, it is very sensitive,' said Mr Maguire, pointing to rising protectionist sentiment in the United States in a presidential election year.

China's financial stakes in Morgan Stanley and Blackstone have also soured as the credit crisis has spread, offering painful lessons in market volatility to investors accustomed to uninterrupted double-digit economic growth.

The expertise required in complex takeovers can also be outside the reach of established foreign banks as well.

After Germany's Commerzbank bought investment bank Dresdner Kleinwort for US$14.5 billion from Allianz last weekend, it unveiled plans to cut 9,000 jobs.

Commerzbank's shares have fallen 14 per cent in response to the deal as the bank said it still needed more cash from shareholders and analysts were sceptical of its ability to turn Dresdner around.

China Development Bank had been seen as a possible candidate to take over Dresdner, though how serious is not known.

Political concerns earlier this year prevented Bain Capital and China's Huawei Co from obtaining US government permission to buy 3Com Corp for US$2.2 billion.

SG's Mr Maguire said the opportunity to buy assets such as investment bank Lehman Brothers may not happen again for decades. Newspapers have reported China's top brokerage Citic Securities is also interested in Lehman.

'I don't think it is an exaggeration to call it a 50-year opportunity,' said Mr Maguire.

State-controlled Korea Development Bank is in talks with Lehman over a possible joint investment with other Korean banks, but has said it was still unsure whether there would be a deal.

'China's leading banks are massive in terms of market capitalisation and assets,' said Jing Ulrich, the head of China equities for JPMorgan Securities. 'But their business reach is limited compared to international banks.'

China's underdeveloped financial industry lags far behind its booming manufacturing sector, underpinning regulators' cautious sentiment that local financial firms need to demonstrate they can walk domestically before they run overseas.

China's Ping An Insurance bought 5 per cent of Fortis, the struggling Belgian-Dutch financial group, for US$2.67 billion last year.

But Fortis said earlier this month Chinese authorities had delayed approval of the US$3.33 billion sale of half of its asset management arm to Ping An.

'It isn't much of an opportunity if you don't have the ability to carry through,' said Gordon Orr, a director at consultancy McKinsey's Shanghai office.

China Development Bank bought a 3.1 per cent stake in Britain's Barclays plc last year but China's Cabinet rejected a request in July to increase that stake when Barclays raised fresh capital.

But firms such as the US$200 billion China Investment Corp, the country's sovereign wealth fund, and China Development Bank could still play important funding roles in consortia led by foreign banks.  --2008 September 8     Reuters

The real threat China poses to the world

Obsessed with rankings, Americans are bound to see the Beijing Olympics as a metaphor for a larger and more troubling question: Will China overtake the United States as the world's biggest economy? Well, stop worrying. It almost certainly will.

China's economy is now only a fourth the size of the US$14 trillion US economy, but given plausible growth rates in both countries, China's output will exceed America's in the 2020s, projects Goldman Sachs.

But this is the wrong worry. By itself, a richer China does not make America poorer. Indeed, because there are so many more Chinese than Americans, average Chinese living standards may lag behind ours indefinitely. By Goldman's projections, average American incomes will still be twice Chinese incomes in 2050.

The real threat from China lies elsewhere. It is that China will destabilise the world economy. It will distort trade, foster huge financial imbalances and trigger a contentious competition for scarce raw materials.

Symptoms of instability have already surfaced, and if they grow worse, everyone - including the Chinese - may suffer. China is now 'challenging some of the fundamental tenets of the existing (global) economic system', says economist C Fred Bergsten of the Peterson Institute.

This is no small matter. Growing trade and the cross-border transfers of technology and management skills contributed to history's greatest surge of prosperity. Living standards, as measured by per capita incomes, have skyrocketed since 1950: up 10 times in Japan, 16 times in South Korea, four times in France and three times in the United States.

Significantly, these gains occurred without serious political conflict. With the exception of oil, world commerce expanded quietly. The chief sources of global strife have been ideology, nationalism, religion and ethnic conflict.

Economics could now join this list, because the balance of power is shifting. The United States was the old order's main architect, and China is a rising power of the new. Their approaches contrast dramatically.

Economically dominant after World War II, the US defined its interests as promoting the prosperity of its allies. The aims were to combat communism and prevent another Great Depression. Countries would make mutual trade concessions. They would not manipulate their currencies to gain advantage. Raw materials would be available at non-discriminatory prices. These norms were mostly honoured, though some countries flouted them (Japan manipulated its currency for years).

China's political goals differ. High economic growth and job creation aim to raise living standards and absorb the huge rural migration to expanding cities. Economist Donald Straszheim of Roth Capital Partners estimates the urban inflow at about 17 million people annually.

As he says, China sees export-led economic growth as a magnet for foreign investment that brings modern technology and management skills. Prosperity is considered essential to maintaining public order and the Communist Party's political monopoly.

At first, China pursued its ambitions within the existing global framework. Indeed, the United States supported China's membership in the World Trade Organization (WTO) in 2001. But as it grows richer, China increasingly ignores old norms, Mr Bergsten argues.

It runs a predatory trade policy by keeping its currency, the renminbi, at artificially low levels.

That stimulates export-led growth. From 2000 to 2007, China's current account surplus - a broad measure of trade flows - ballooned from 1.7 per cent of gross domestic product (GDP) to 11.1 per cent. The biggest losers are not US manufacturers but developing countries whose labour-intensive exports are most disadvantaged.

Next, China strives to lock up supplies of essential raw materials: oil, natural gas, copper. If other countries suffer, so what? Both the United States and China are self-interested.

But the US has seen a prosperous global economy as a means to expanding its power, while China sees the global economy - guaranteed markets for its exports and raw materials - as the means to promoting domestic stability.

The policies are increasingly on a collision course. China's undervalued currency and massive trade surpluses have produced US$1.8 trillion in foreign exchange reserves (China in effect stockpiles the currencies it earns in trade).

Along with its artificial export advantage, China has the cash to buy big stakes in American and other foreign firms.

Predictably, that has stirred a political backlash in the United States and elsewhere. The rigid renminbi has contributed to the euro's rise against the dollar, threatening Europe with recession.

China has undermined world trade negotiations, and its appetite for raw materials leads it to support renegade regimes (Iran, Sudan). The world economy faces other threats: catastrophic oil interruptions, disruptive money flows.

But the Chinese-American schism poses a dilemma for the next president. If Americans do nothing, China's economic nationalism may weaken the world economy - but if we retaliate by becoming more nationalistic ourselves, we may do the same.

Globalisation means interdependence; major nations ignore that at their peril. -- 2008 August 21    The Washington Post Writers Group

RETAIL

At Fendi, creative director Karl Lagerfeld staged the first-ever runway show on the Great Wall of China last October in, arguably, the slickest example of brand building that the luxury market has seen in years.

"Why are we in China? Because in the next 25 years, it will become the world's greatest economic power and we want Fendi to be very important in this country," Bernard Arnault, president of LVMH, the giant French luxury empire that Fendi, told Fashion Wire Daily.   - 2008 Spring  FQ MAGAZINE

"Our conviction over the medium term is the China real estate story. . .strong personal income growth, the urbanisation and industrialisation demand, and also lack of alternative investments"  -   2008 February 26    ING's Justin Pica 

Buying Into China's Land Rush
Americans, Others Acquire Luxury Homes Despite Restrictions

Once known for drab, government-controlled housing and ancient courtyard homes, China has become a land of multimillion-dollar apartments and soaring property values. And foreigners are trying to get in on the action.
   SLIDE SHOW
Real-estate prices in major Chinese cities have been shooting up at double-digit rates year over year, boosted by an economy that has been growing at more than 10% annually. The jump in prices has been so sharp that the government in mid-2006 implemented stricter controls on foreign investment in hopes of reining in housing costs. Still, foreigners keep buying.

Bill Bishop, a 39-year-old American living in China, bought a four-bedroom penthouse in Beijing in 2005, choosing a luxury complex built by a big-name developer and run by a well-known property manager. The apartment was an unfinished shell -- a common way of buying a unit in China -- and fitting it out took more time and attention than Mr. Bishop, a private investor, imagined it would. But he estimates that the home, for which he paid "a fraction of the cost of an apartment in Manhattan or San Francisco," now is worth at least 50% more than he paid for it.

Behind the run-up in property values is the scarcity of housing for sale. Analysts predict the growth will continue even after the building boom sparked by the Beijing Olympics this year tapers off, despite post-Games housing downturns that occurred in other Olympics cities such as Barcelona, Spain, and Sydney, Australia.

In the last few years, the average growth rate of residential prices in major Chinese cities has been 15% to 30%. Those prices will continue to rise at a rapid clip this year, though the rate of growth should slow, predicts Anna Kalifa, head of research for U.S. real-estate services firm Jones Lang LaSalle in Beijing.

Already there have been signs of a slackening in several southern cities. Prices for new homes in Shenzhen, a boomtown of nine million that borders Hong Kong, dropped 8% from September to the end of the year, according to global real estate advisers DTZ. In nearby Guangzhou -- China's third-largest city behind Beijing and Shanghai -- new-home prices fell 9.9% in November from October, according to city government statistics. Yet many brokers and analysts are reluctant to draw too many conclusions from the downturn in the south. They point to the tides of middle-class Chinese who continue to pour into big cities looking to buy a first home. "Fundamental demand in China across the board is very strong and will remain that way for the next 10 years," says Alan Chiang, the Shenzhen-based head of mainland China residential property at DTZ.

The real-estate boom has extended beyond Beijing and Shanghai, China's main population centers, to second-tier cities like Chengdu in the west, Hangzhou and coastal Qingdao and Dalian, experts say. As multinational companies push into less built-up parts of China they are bringing along expat employees who have helped feed property growth there, too.

Many investors say they have done well. Patty Chen, 53, an American living in Shanghai, says she sold one of her first apartments in the city -- a 1,829-square-foot luxury unit downtown -- for $600,000 in 2005, almost three times what she paid for it for in 2000.

Chinese real estate wasn't always a hot prospect. Foreigners in Beijing once were forced to live in government-approved housing -- chiefly diplomatic compounds and hotels -- often at astronomical rents. Buying was difficult. But laws began to change in the late 1990s and with China's entry into the World Trade Organization in 2001.


Today, upscale developments are popping up all over China's major cities -- in Shanghai, luxury apartments can go for as much as $20 million. The Beijing Yintai Center, a high-rise development that opened in 2007 with apartments ranging from 1,076-square-foot one-bedrooms to 9,253-square-foot penthouses, is almost sold out, a spokesman says. A salesperson for the property, a joint venture between Hyatt International, Merrill Lynch and China Yintai Holdings Ltd., quoted the equivalent of $1.35 million for a 2,582-square-foot apartment in the project's 63-floor tower.

On average, however, a 1,640-square-foot apartment with Western amenities in Beijing costs about $400,000, says Jones Lang Lasalle, while the same quality and size apartment would go for $520,000 in Shanghai and $190,000 in Chengdu.

Worried that real-estate speculation was leading to higher prices, China's government rolled out regulations in July 2006 that greatly restrict foreigners' ability to purchase homes. Under the rules, foreigners can't buy a home until they have lived in the country for at least a year. And they are restricted to owning just one home at a time. The full-year requirement applies to all foreigners except Taiwan and Hong Kong residents who have a Chinese work visa.

But as with most laws in China, gray areas exist. Some foreigners have been approved to buy homes despite having traveled in and out of China during their first year. "The rules aren't clear on how that one year is calculated," says Kevin Tu, a Beijing-based agent who works with foreign buyers. Agents also say that foreigners who owned multiple homes before the new rules not only can keep them but may buy an additional property. Ms. Chen, the American in Shanghai, says she owned seven residential properties before the regulations changed and had no problem buying another one afterward.


There are other potential downsides to China property purchases. Foreigners must borrow locally, and down payments typically are at least 30%. Lenders sometimes will loan only 50% to 60% of a property's value if the buyer already has another mortgage. Property sold within five years of purchase is subject to a 5% tax, a levy designed to discourage flipping.

Ms. Kalifa of Jones Lang LaSalle says researching the background of developers is especially important because buyers generally must hand over the purchase price to a developer before construction is finished -- the country lacks escrow services to provide a safeguard. Some buyers, in fact, have been unable to move in until a year or more after the agreed date. And since the government owns all the land in China, real-estate purchases are technically very long-term leases, usually up to 70 years.

Still, Ms. Kalifa says an investment could be well worth it for anyone looking to live in China for at least three to five years. "There's a major need for housing," she says. "People are looking for investment options, and housing is a no-brainer."   - 2008 January 18  WALL ST. JOURNAL

China real estate sector cools down

Big chill: More brokers are closing which may mark the start of a broader slump in a previously booming market

After booming in recent years, China's real estate market is finally starting to feel the pinch from sagging demand and tighter controls.  

One of China's biggest real estate agencies, Chuanghui Real Estate, has shuttered dozens of outlets in Shanghai and other cities, leaving angry customers and employees, after an ill-timed expansion just as the market was peaking. Many other agencies around the country have also closed down.

So far, the retrenchment appears to be mainly limited to property brokers. But the moves could herald the beginning of a broader slowdown in one of Asia's hottest real estate markets.

The government has been wrestling to get control of the property sector, worried that rising prices for housing are pushing poorer Chinese out of the market at a time when overall inflation is surging.

Regulators stepped up curbs on the property market last year, alarmed that 'bubbles' in property prices could collapse and trigger a financial crisis. Those efforts are starting to take effect. While urban housing prices last month rose 10.5 per cent from a year earlier, a sharp slowdown in sales transactions in recent weeks suggests a new trend.

In the first week of 2008, home sales in Beijing fell 20 per cent compared with the previous week, the state-run newspaper China Securities News reported. Sales were off 38 per cent in Shenzhen and 52 per cent in east China's Nanjing, it said.

Realtors say the slump started late last year but due to various reasons, like land supply and property hoarding by developers, the impact hasn't been seen yet in prices.

So far, there are no signs of a mortgage meltdown in China similar to that seen in the US, and experts don't foresee property prices to fall substantially. Strong economic growth and surging demand from upwardly mobile families are supporting demand.

But business is slowing, especially for the so-called 'second-hand' apartments, or existing, rather than newly built homes, that are the lifeblood of local realtors in this recently commercialised market.

'In 2008, we think property developers will face some liquidity problems and financing issues,' Matthew Kong of ratings agency Fitch Asia Corporates said recently. -- 2008 January 22      AP

China’s housing index on the rise

China´s National Housing Climate Index registered 106.59 points in November, up 0.85 points over October and 2.67 points over last November, marking the eighth consecutive monthly rise since March this year, the National Bureau of Statistics released on Monday.

Investment in real estate development entered into a fast growth track this year, with November real estate development investment index went up 0.11 points month-on-month and 3.07 points year-on-year to arrive at 104.53 points. In the first eleven months of this year, China´s real estate development investment recorded at 2.16 trillion yuan, while investment for residential housing reached 1.544 trillion yuan in the period, of which 69.3 billion yuan went into the development of affordable housing, a growth of over 30 per cent.

Meanwhile, the land development acreage category index in November went up by 0.42 points over October to reach 98.04 points, which marks a year-on-year decline of 3.49 points. China´s real estate developers made a combined development acreage of 214 million sq. meters in the first eleven months, up 8 per cent year on year.

The index for idle commercial housing went up 1.26 points over October to 111.97 points, marking a year-on-year rise of 6.54 points. By the end of November, China´s idle commercial housing acreage registered at 117.97 million sq. meters, down 4.5 per cent year-on-year; of which idle commercial residential housing acreage stood at 57.66 million sq. meters, down 14.2 per cent year on year.   - 2007 December 17   ASIA PULSE

China house prices rise fastest in two years
Prices in 70 major cities surge 9.5% in Oct

China's house prices rose in October at the fastest pace since 2005 as inflation outpaced returns on bank deposits, encouraging households to invest in property.

Fever pitch: The govt's recent steps to cool real estate speculation included lifting downpayments to 40% from 30% for housing loans. Housing sold to buyers hoping to sell at higher prices accounts for a big part of total sales

Prices in 70 major cities jumped 9.5 per cent from a year earlier after gaining 8.9 per cent in September, the National Development and Reform Commission said yesterday on its web site. That was the biggest gain since records began in August 2005. Values climbed 1.6 per cent from September.

The acceleration is fuelled by the cash flood from China's trade surplus, a record US$27 billion in October, prompting concerns about a possible property bubble.

China in September raised interest rates on some mortgages and increased minimum down payments to curb real estate speculation.

'Price gains are understandable because the strong demand is still out there,' said Liu Xihui, a Shenzhen-based analyst with Ping An Securities Co. 'The reason prices are still accelerating is probably because September's tightening measures haven't yet had an effect.'

Prices soared 19.5 per cent in October from a year earlier in Shenzhen and 15.1 per cent in Beijing, the commission said. New commercial housing valuations rose 10.6 per cent from a year earlier and second-hand prices increased by 8.7 per cent, it said.

Measures introduced by China on Sept 27 to damp property speculation included raising downpayments to 40 per cent from 30 per cent for housing loans, and to half a property's value for commercial real estate.

The steps will slow property price increases in the balance of the year by crimping buying for investment purposes, said Ping An Securities' Liu. Housing sold to buyers hoping to sell at anticipated higher prices accounts for a 'big part' of total sales, he said.

September's measures came after new taxes, higher mortgage rates and downpayment ratios imposed since 2005 failed to cool the market. Investment in real estate development jumped 30.3 per cent in the first nine months of 2007, 6 percentage points faster than a year earlier.

China's consumer prices rose 6.5 per cent last month from a year earlier, matching the decade high in August, as food costs surged. The benchmark one-year deposit rate is 3.87 per cent.

China has this year raised interest rates five times and ordered lenders on nine occasions to set aside larger reserves to curb inflation and contain bubbles in the property and stock markets. --   2007 November 14   BLOOMBERG

China's booming economy is helping to support global growth as America turns sickly. So now it has to keep up the pace

Illustration by Bill Butcher

No country in history has sustained such a blistering rate of growth over three decades as China. Its economy grew by a staggering 11.9% in the year to the second quarter. Since 1978 it has grown by an average of almost 10% a year—more than Japan or the Asian tigers achieved over similar periods when their economies took off. But eventually every sprinter trips. Japan's growth averaged 9.5% in the two decades to 1970, but slowed to 4.7% in the 1970s and to only 1% by the 1990s.

As China has grown, it has come to matter much more to the rest of the world. For the first time it is now contributing more to global GDP growth (measured at market exchange rates) than the United States is. Yet, even as growth forecasts for China are being revised upwards, America is looking at a downturn caused by falling house prices, which threaten to clobber consumer spending. The fate of the world economy now hinges not just on America, but also on China's economic fitness continuing over at least the next two years

So what immediate threats does China face? The biggest worry is that the economy is overheating and inflation surging out of control. In August consumer-price inflation jumped to 6.5%, up from 1.3% a year earlier and its highest for more than a decade. If China slams on the brakes, its economy could suffer a hard landing, as happened after past episodes of inflation.

But inflation is nowhere near previous danger levels in 1988 and 1994, when it soared above 25% (see chart 1). Moreover, the leap in inflation does not seem to be a symptom of overheating caused by excess demand, as it was in the past. It is due entirely to the rise in food prices caused by supply-side problems. Excluding food, inflation is only 0.9%. This does not mean that food is unimportant: it accounts for one-third of the inflation basket, and rising prices could trigger social unrest. But it is not something that China's central bank can easily fix by raising interest rates. The bank has raised interest rates five times this year, but they still remain low relative to the country's growth rate.

Growing public concerns over inflation recently prompted Beijing to introduce a freeze until the end of 2007 on a wide range of government-controlled prices, such as oil, electricity and water. A more effective way to curb inflation would be to allow the Chinese currency to rise faster. This would reduce import prices of food and raw materials and also curb the build-up of liquidity as a result of rising foreign-exchange inflows.

Unless checked, excessive monetary growth combined with over-rapid GDP growth could eventually lead to more general inflationary pressures. In its latest “China Quarterly Update”, the World Bank says that in the first half of 2007 China grew faster than its potential growth rate (currently estimated at around 10.5%) for the first time in a decade (see chart 2). However, excess demand is tiny compared with previous phases of overheating so the risk of soaring inflation causing a hard landing in the near future is remote.

Bubble trouble

A second much-talked-about threat is the bursting of China's stockmarket bubble. Share prices have risen by 400% in just over two years, and average price-earnings ratios based on historic profits are around 50 (based on forecast 2008 profits they are a still-racy 30). Even though almost everyone reckons this is a bubble, history suggests that a bust is not imminent and that share prices could continue to rise for a lot longer: both Japan's Nikkei and America's NASDAQ saw p-e ratios well above 100 at their peaks.

Even if share prices did tumble this year, the impact on the economy would probably be relatively modest. The total value of tradable shares—that is, excluding those held by the government—is only 35% of GDP compared with 180% in America at its peak in 2000. Equities account for less than 20% of Chinese households' total financial assets, compared with half in America, so price swings have less impact on spending. When Chinese share prices collapsed by 55% from 2001 to 2005, GDP growth remained robust. Over the past year there has been little sign that people are saving less and spending their capital gains, so a slump in share prices should not have much impact either.

Share prices can also affect the cost of capital. But only a small proportion of Chinese companies are listed on the stock exchange and those that are rely mainly on internal finance. Only 10% of total financing for investment this year has come from equities. A more serious problem is that because firms have invested in other companies' stocks, a slump in share prices could directly hurt their profits and hence their investment. According to a study by Morgan Stanley, one-third of listed companies' profits in the first half of 2007 came from share-price gains and other investment income. If share prices sink, so will profits, which would make shares look even more overvalued.

Some analysts also worry that a sharp plunge in equity prices could seriously hurt banks' balance sheets, causing them to squeeze their lending. Chinese banks are officially not allowed to lend to investors to buy shares, but anecdotal evidence suggests that households and firms have taken out loans disguised as mortgages to buy shares. If so, the effect of the bubble bursting could be larger than the direct impact on consumers' wealth—especially if, as seems more likely, the bubble continues to swell for another couple of years before it finally bursts.

In many ways China today looks ominously similar to Japan before its bubble burst at the start of the 1990s, resulting in a decade of stagnation. Like Japan, China has high rates of saving and investment, low real interest rates, soaring asset prices, a big current-account surplus and upward pressure on its currency. After the Plaza accord between the big industrial countries in 1985, the Japanese yen rose by 80% against the dollar in three years.

Many in China have concluded that the blame for Japan's economic malaise in the 1990s lay largely with the appreciation of the yen. Beijing has therefore allowed the yuan to rise by only 10% since July 2005. But Japan's real mistake was its loose monetary policy to offset the impact of the rising yen—which further inflated the bubble—and then its failure to ease policy once the bust had happened. By holding down the value of the yuan and allowing a consequent build-up of excess liquidity, China risks repeating the same error.

However, Paul Cavey, a China economist at Macquarie Securities, suggests that China may have more in common with Taiwan in the 1980s than with Japan. Taiwan's bubble was even bigger, with share prices rocketing by 1,800% between 1985 and 1990. In Japan, reserve accumulation did not play a big role in the bubble. By contrast, the foreign-exchange inflows into Taiwan were greater in relation to its GDP than those seen recently in China. Taiwan, like Japan, saw a big rise in its exchange rate, by 60% in the four years to 1989.

In 1990-91 the Taipei stockmarket slumped by 75%, even more than the Tokyo market did. But Taiwan's growth remained fairly strong because policy was eased much sooner than it was in Japan. In other words, contrary to Beijing's fears, a big exchange-rate rise does not inevitably lead to economic depression.

The other big difference between China and Japan in the late 1980s is that Japan had a serious property bubble against which banks had lent heavily. Although a house-price crash would have much nastier consequences for China's economy than a share-price crash, because 80% of China's urban households now own their home, there is no evidence of a nationwide housing bubble. Average house prices across China are rising at an annual rate of 8%, with double-digit gains in some cities, such as Shenzhen and Beijing.

In a developed economy such increases might seem a little bubbly, but not in one in which nominal GDP is growing at an annual pace of 15%. The ratio of house prices to average income has fallen by 25% in China since 1999. In contrast, at their peak last year American house prices had risen by 45% relative to incomes. A collapse in house prices therefore seems unlikely in China.

If America sneezes

If neither a surge in inflation nor a bust in asset prices seem likely to derail China's economy over the next year or two, what about a recession in America? Exports account for over 40% of China's GDP, so some economists predict that a fall in exports as a result of a downturn in America would create massive excess capacity and a sharp fall in profits and investment—the making of a nasty hard landing. But the popular notion that China is dependent on export-led growth is a myth; domestic demand is much more important. This year the increase in China's net exports (ie, less imports) is likely to account for about one quarter of its growth—a record amount. But even without this external boost, GDP growth would still have been a respectable 9%.

During America's 2001 recession, China's export growth fell by 25 percentage points, but imports also slowed sharply, so GDP growth (as officially reported) remained strong. Since then, the share of its exports to America has shrunk; the European Union and other emerging economies are now more important markets. In the three months to August, Chinese exports to America increased by 14% compared with a year earlier, whereas those to the EU grew by 40%.

America's slowdown so far largely reflects a collapse in house-building, but if consumers cut their spending, the impact on Chinese exports would be harsher. The World Bank estimates that if American consumption falls by the equivalent of 1% of GDP, this could knock 0.2-0.5 percentage points off China's GDP growth, depending on how much the Federal Reserve does to cushion the downturn.

A recession in America would reduce China's growth, but since Beijing's policy-makers are fretting that the economy is starting to overheat, weaker exports and hence slower GDP growth might be a good thing. Not only would it reduce the risk of inflation, but it would also help to trim China's embarrassing trade surplus.

If a fall in exports threatens to slow growth by more than desired, the government's strong fiscal position means that it has plenty of room to boost domestic demand by spending more on infrastructure, education or health. The budget was in small deficit in 2006, but may now be in surplus—even excluding the large surpluses of state-owned enterprises. China's public-sector debt is only 18% of GDP, much lower than the 75% average in developed economies, giving the government ample room for a fiscal stimulus.

In the short term, therefore, an American downturn is more likely to cause sniffles in China than a heavy cold. Indeed, an American recession might be a blessing in disguise to China: if weaker exports forced the government to do more to boost domestic demand it would help to rebalance the economy and make growth more sustainable in the long run.

The bigger danger is that an American recession would inflame America's increasingly protectionist mood and make trade sanctions against China more likely. In an election year, politicians will need a scapegoat. But import barriers would do more harm to America's economy than China's. If China was forced to depend less on exports and more on consumption it would gain in the long run.

Running out of fuel?

In recent months there has been much talk about a new threat. China, it is claimed, is running short of cheap labour—the main source of its extraordinary growth. This is nonsense. It is true that average wages have risen by around 15% over the past year, but labour productivity in manufacturing has risen even faster. Indeed, wages have been rising at double-digit rates for a decade with no harmful impact on growth, because higher labour productivity has actually reduced wage costs (see chart 3). There are localised skill shortages, but it is hard to believe that China's labour surplus is exhausted when almost 60% of the population still lives in rural areas. The wide income gap between rural and urban areas will continue to attract workers from farms to factories.

In any case, it is not true that China's growth has been based primarily on cheap labour. Over the past decade, the increase in the labour force has contributed an average of only 1% a year, or one-tenth of its GDP growth. It is true that the population of working age will peak by 2015 and then start to shrink. But an analysis by the World Bank argues that China is unlikely to face a labour shortage for many years. The decline in the working-age population can be offset by making it easier for surplus labour to migrate into cities.

One thing China does not seem short of is capital investment. Indeed, some economists have long predicted that overinvestment as a result of an artificially cheap cost of capital will lead to China's downfall. Sooner or later, it is argued, overcapacity will lead to a plunge in capital spending, bringing the economy crashing to earth.

According to government figures, China's investment amounts to over 45% of GDP and is growing at 25% a year. But many economists reckon that is grossly overstated. For example, land purchases are wrongly counted as new investment when they are really just a transfer of ownership. If China were massively overinvesting, one would expect the return on capital to be falling. Instead, corporate profit margins have been rising. Mr Cavey estimates that average capacity utilisation, measured by the ratio of sales to assets, has been rising not falling—in strong contrast to Japan during its 1980s bubble.

Worries about rising excess capacity feed another long-standing concern that China's banks, groaning under the weight of non-performing loans, are heading for a crisis. Official figures show that non-performing loans had fallen to 7% of all loans early this year from almost 30% in 2001. But independent analysts suggest the true figure may be closer to 20% (down from over 50% at its peak). The fear is that an economic downturn and falling profits could lead to a surge in new bad loans.

China's fragile and inefficient banking system is certainly a drag on its economy, but the risk that a banking crisis could bring down the economy seems small. China has huge foreign-exchange reserves available to protect its banking system. Capital controls limit capital flight. And the government, unlike Japan's in the 1990s, has plenty of money if necessary to write off bad loans.

The list of potential threats to China's economy is long and some might shave a couple of percentage points off its growth rate (leaving it close to 10%). But none seems likely by itself to cause the economy to collapse in the next two years—ie, during the time when America's economy is likely to stumble. But what if several blows land at the same time? For example, an American recession breeds greater protectionism, global financial turmoil unnerves Chinese stockmarket investors, share prices collapse and a downturn creates social unrest. The overall impact on the economy would then be more painful.

China's best insurance against this is that its budget finances are in better shape than those of any other big economy. China's leaders are acutely aware of the risks of social unrest and they will be willing and able to try to spend their way out of trouble. That makes a sharp downturn in China less likely in the near future. But what about farther ahead?

China's economic success has been based on the essential ingredients of growth: high savings, openness to trade, good education and strong productivity growth. This means its long-term prospects remain strong, although its trend growth rate will inevitably slow as its economy matures and its labour force starts to shrink.

Tao Wang, Bank of America's economist in Beijing, says she is optimistic about China's economy in the short term and the long term, but thinks the medium term looks risky. There is a high chance of a sharp slowdown sometime within the next ten years. The problem with years of rapid growth is that it hides problems that are then painfully exposed when times are hard. But for the time being, the chances are that China can keep sprinting even if America takes to its sick bed. That is good news for the world.   - 2007 September 27   ECONOMIST

China growth fastest in 11 years

China’s full-year growth for 2006, figures for which were released on Thursday, has outstripped expectations, with gross domestic product expanding by 10.7 per cent, the fastest annual rise in more than a decade.

The new figure means that China has recorded double-digit economic growth for four consecutive years. It also means that if – as many expect – it records a similar pace of growth this year, China’s economy could as early as 2008 leapfrog that of Germany’s to make it the world’s third largest in absolute terms.

However, the government’s satisfaction on Thursday at the management of such strong growth was tempered by a surge in inflation to 2.8 per cent in December, compared with the whole-year rise of 1.5 per cent.

The increase in inflation and continued strong overall growth lifted expectations of possible further tightening measures from the People’s Bank of China, the central bank, in the near future.

The government’s response to the GDP figures for the most part hailed the success of a credit crunch, which has slowed growth from a peak of 11.5 per cent in the second quarter to 10.4 per cent in the fourth. - FINANCIAL TIMES   25 Jan 2007 


SHORT FACTS

  • One in four people globally, including China’s population, will be able to speak Mandarin fluently by year 2007. Over 30 million people around the world now take Mandarin courses at 2,500 universities in 100 countries.    - Source: Borneo Bulletin, U.S. Census Bureau

  • Shanghai families with young children spend 23.6% of total income on kids' education, a far high ratio than the 10% spent in the U.S. and Canada, according to Shanghai's Women's Union and Shanghai's Academy of Social Sciences. But among China's 480 million rural laborers, 80% only received primary education or below.    - Source: Xinhua, McCann Worldgroup

The real estate market in China is still volatile though as evidenced by the article that follows:

China to raise downpayment for second homes: sources

China will soon raise the downpayment requirement for people buying their second home to 40 per cent, in an effort to curb speculation in the red-hot property market, banking and regulatory sources said yesterday.

It will also raise to 50 per cent from 40 per cent the downpayment requirement for commercial property like offices and retail space, the sources told Reuters. They did not provide a specific date for the changes, but one official said they would be unveiled 'very soon'.

'In order to curb the excessive rises in property prices, the government will on the one hand increase the supply of low-rent flats and on the other hand raise the downpayment requirement,' said one source.

Annual property price inflation in 70 major cities accelerated to 8.2 per cent in August, with prices going up 20.8 per cent in the southern boomtown of Shenzhen and 12.1 per cent in Beijing. State media said the nationwide rise was a record high.

After the changes, there will be three different levels of downpayment requirements for people seeking mortgages to purchase a home. Anyone buying a second or subsequent home will need to put down 40 per cent; those buying their first home will pay 30 per cent if it is larger than 90 sq m (969 sq ft); and those buying a first home that is for their own use and is smaller than 90 sq m will need to pay 20 per cent.

It will be the second time in about 15 months that Beijing has raised downpayment requirements to try to cool down the property market. The Cabinet raised it for home mortgages to 30 per cent from 20 per cent in June 2006 as part of a package of measures to deter property speculation, exempting smaller, owner-occupied flats. -- Reuters    2007 September 18

Flat sales plunge in stocks mania

Home sales in Beijing nosedived in the first three months as hundreds of thousands of investors shifted from bricks and mortar to chase quick gains in the mainland share market where valuations are stretched and trading volumes have been ballooning to record highs.

National Bureau of Statistics figures show that sales of completed residential properties in the capital tumbled almost 60 percent year on year to 615,000 square meters during the first quarter.

Presales of uncompleted flats also slumped more than 40 percent to nearly 1.8 million sqm in the same period.

Market watchers attribute the sharp fall to steep price increases as well as real estate speculators switching to the stock market. People from all backgrounds - from housewives and cooks to pensioners and professionals - are getting in on the act to "stir fry" shares, buying even small-caps.

Mainland investors opened 4.7 million new stock trading accounts in the first two months of the year, data from the China Securities Regulatory Commission show.

While transactions fell, home prices continued to climb. According to the National Development and Reform Commission, home prices in Beijing increased 9.9 percent in the first quarter.

"The ultimate reason for surging home prices is supply shortfall," said Sherman Lai Ming-kai, managing director of Centaline (China) Property Consultants.

Lai would like to see Beijing release more land for sale to stabilize the market in the long term. He expects housing prices in Beijing to rise 10 to 20 percent this year. "Some buyers will return to Beijing's's property market in the second half when developers are expected to speed up sales of new projects, as normally annual sales volume including the primary and secondary markets should exceed 20 million sqm," Lai said.

Property consultancy CB Richard Ellis said macroeconomic measures as well as sluggish sales during the Lunar New Year holidays combined to drive residential transaction volumes lower in the first quarter.

Enforcement of a land appreciation tax in February indicated a new round of austerity measures aimed at cooling China's soaring property sector, as previous initiatives seemed inadequate.

"LAT and the regulation of foreign purchases of commercial housing will continue to have a positive effect on stabilizing prices and discouraging investment," CB Richard Ellis said in a report.

Notwithstanding the fact, with the release of several top-quality projects in Beijing, Shanghai and Guangzhou, the average sale price of these three cities increased in the first quarter, the consultancy said.

Lai of Centaline said home prices in Guangzhou were up less than 10 percent in the first quarter, while apartment prices in Shenzhen jumped more than 10 percent amid a dearth of new supply. Average housing prices in the two cities climbed 20 percent last year, outperforming other cities. "Unless the central government introduces tougher measures, housing prices should continue their upward trend nationwide this year while transactions may pick up," Lai said   -   THE STANDARD     26 April 2007

China property prices rise faster in January
Prices in 70 major cities up 5.6% from a year earlier

(BEIJING) China's property prices rose faster in January, the nation's top planning agency said yesterday, even as the government has been trying to slow increases withcurbs on land supply and bank loans.

Prices in 70 major Chinese cities in January increased 5.6 per cent from a year earlier, 0.2 of a percentage point faster than the growth rate in December, the National Development and Reform Commission said in a statement on its website.

The January prices were 0.6 per cent higher than in December, it said.

New housing prices rose 6.1 per cent in January from a year earlier, one-fifth of a percentage point slower than in the previous month, the statement said.

The southern city of Shenzhen, which adjoins Hong Kong, had the fastest gain, 10.2 per cent, followed by Beijing with a 9.9 per cent increase, it said.

China's economic growth has averaged 10 per cent a year for the past five years, fuelling property demand and pushing up prices. Property prices in 70 major Chinese cities rose 5.5 per cent last year, 2.1 percentage points slower than in 2005, as the government imposed curbs on land and bank loans, the central bank said in a Feb 9 report.

Yet property prices in some big Chinese cities are 'still rising too fast', and the government will 'stabilise' prices by containing excessively strong demand, increasing the supply of small and medium-sized apartments and tightening regulation, the official Xinhua news agency reported on Feb 25, citing a meeting of the State Council, the nation's Cabinet.

Prices of second-hand housing climbed 5.3 per cent in January from a year earlier, 1.1 percentage points faster than in December, according to the statement.

Non-residential commercial property including office buildings and industrial warehouses sold at prices 4.5 per cent higher than a year earlier, 0.1 of a percentage point more than in December. - BloomberG    2007 March 1

China's economy set for longest expansion since '78: Goldman Sachs
It may grow 9.8% next year and 10% in 2008

China's economic boom will probably continue for at least another two years, making it the longest and least volatile expansion since free-market reforms began in 1978, Goldman Sachs Group Inc said.

The world's fourth-largest economy may grow 9.8 per cent next year and 10 per cent in 2008, Goldman economist Liang Hong said yesterday in a note to clients. The expansion will cause only 'limited' pressure on inflation to quicken, she said.

China's entry into the World Trade Organisation five years ago prompted the government to open more of the economy to competition, leading to productivity gains, Ms Liang wrote. The World Bank last month forecast the economy will expand 10.4 per cent this year, which would be the fastest pace since 1995. 'Trend growth is likely to be close to 10 per cent in China over the medium term, driven by significant productivity gains,' Ms Liang wrote. 'The real economy has become much more flexible and market-oriented compared with the last cyclical boom more than 10 years ago.'

The Chinese economy grew 10 per cent in 2003, 10.1 per cent in 2004 and 10.2 per cent last year. During the last five-year stretch of at least 10 per cent expansion - from 1992 to 1996 - growth varied between 14.2 per cent and 10 per cent and the inflation rate climbed as high as 28 per cent.

Using Ms Liang's estimates, the size of China's economy would increase to US$3 trillion in 2008 assuming the nation's currency is unchanged against the US dollar, according to Bloomberg calculations. The yuan has climbed 5.7 per cent from 8.3 per dollar, where it was pegged for a decade until July 2005. It traded at 7.8258 to the dollar at 10:45am in Shanghai.

Such an expansion means China could overtake Germany as the world's third-largest economy. Germany's gross domestic product was worth US$2.8 trillion last year, according to Bloomberg data.

China's prospects of achieving smoother and more sustainable growth are also bolstered by the central bank's larger role in economic policy, wrote Ms Liang.

The People's Bank of China has raised interest rates twice this year and forced banks to set aside more money as reserves to rein in lending and investment.

The central bank 'now commands a much better understanding of macro issues and has a broader range of tools to conduct monetary policy', Ms Liang said. It 'has managed to 'stay on the curve' with much fewer hiccups than during past cycles'.

China's economy has grown an average 9.7 per cent a year since former leader Deng Xiaoping began market reform in 1978, and is currently expanding at about double the pace of the global economy. - 2006 December 5 Bloomberg

China mortgage market is Asia's largest

China's housing mortgage market has become Asia's largest with a value of US$227 billion, according to the most recent quarterly Bank for International Settlements report.

The market, which didn't exist until 1998, made up about 10 per cent of China's gross domestic product in 2005, the Basel, Switzerland-based BIS said. China's GDP last year was 18.2 trillion yuan (S$3.6 trillion).

China, where traditionally people in urban areas live in a free welfare housing system, didn't have privately owned houses until the 1980s, the report said. The market remained small until the government ended the welfare housing system in 1998. Commercial banks have since become the dominant lender in the primary mortgage market, according to the BIS.

Property prices in 70 cities in China increased 5.4 per cent in October on average from a year earlier, compared with a 5.3 per cent gain in September, the National Development and Reform Commission said on its website last month.

South Korea has the second-largest amount of mortgage debt outstanding among the six countries compared in the report, which was written by Basel-based Haibin Zhu.

The market in South Korea grew three-fold since 2001 to US$200 billion this year, and mortgage loans account for 26.6 per cent of the economy, the report said.

The region includes Singapore and Hong Kong, where mortgage loans account for 61 per cent and 44 per cent of the economies respectively, the BIS report said. -   2006 December 12     Bloomberg

China property prices up 5.8%

China's urban real estate prices increased 5.8 per cent from a year earlier in May, faster than the 5.6 per cent rise the previous month, a government survey showed.

Property prices, including residential and commercial houses, rose 0.7 per cent from April, according to a survey of the nation's 70 biggest cities, the National Development and Reform Commission said in a statement on its website yesterday.

New housing prices climbed 6.1 per cent last month from a year earlier, slowing from a 6.4 per cent rise in April, the top planning agency's survey said.

China's authorities are under increasing pressure to slow the rise in property prices after taxes and higher mortgage rates imposed in 2005 failed to prevent prices rebounding, prompting complaints that property has become unaffordable for many people.

The north-eastern city of Dalian, in Liaoning province, reported the highest new residential apartment price increases in May: 15.2 per cent year-on-year and 3.5 per cent from April.

Shanghai's new apartment prices fell 6.2 per cent year-on-year in May, according to the survey.

The price of second-hand housing rose 6.7 per cent from a year earlier, accelerating by 0.9 percentage point from April, the survey said.

China's government on May 29 announced a plan to raise the minimum downpayment for larger apartments to 30 per cent and more than doubled the period during which a property sales tax will apply, as part of efforts to cool surging property prices. -  15 June 2006  Bloomberg


China launched a series of steps Monday aimed at curbing the mainland's soaring property prices, including raising the minimum down payment for home buyers and sales tax on the transaction of second-hand apartments

China launched a series of steps Monday aimed at curbing the mainland's soaring property prices, including raising the minimum down payment for home buyers and sales tax on the transaction of second-hand apartments.

The initiatives, following general guidelines laid down by the State Council on May 17, will raise the minimum down payment to 30 percent from the current 20 percent for people buying flats larger than 90 square meters.

The government also extended the period applying sales tax for selling second-hand apartments, amounting to 5.5 percent of the sales income, to five years from two years.

Both new rules will take effect Thursday, said a statement issued by nine ministries, including the Ministry of Construction, the Central Bank and State Administration of Taxation, published by the official Xinhua News Agency.

The new regulations contain more specifics on payment, land supply and taxation, elaborating on the guidelines given by Premier Wen Jiabao, known as the six-point directives, on May 17.

This marked the second time Beijing has taken measures to cool down rising property prices since 2005. Last June 11, the government introduced the original sales tax on the transaction of second-hand properties, in an effort to beat down real estate speculators.

"The rules last year didn't solve the problems such as rapid surging prices in a few cities, conflict in the structure of house supply, and unregulated market manners," Monday's statement said.

Housing prices in 70 large and medium-sized Chinese cities rose an average of 5.5 percent in the first quarter of 2006 from a year earlier after dipping for several months. Some major cities, such as Beijing, Shenzhen, Guangzhou and Dalian, reported price hikes of more than 15 percent, according to a recent National Development and Reform Commission report.

Buyers of apartments smaller than 90 squares meters for individual use will be exempt from the increase on minimum down payment, in order to meet the need of middle and low income residents, the statement said Monday.

The new regulations also require property developers to build at least 70 percent of the units smaller than 90 sq m in projects approved or those starting construction from Thursday.

The new rules also urge developers to start building on the acquired land as soon as possible.

The government threatens to reclaim land if developers haven't started construction two years after land acquisition.

In addition, commercial banks are not allowed to lend money to developers with less than a 35 percent deposit of the project capital, the statement said.

Bankers may not accept apartments vacant for more than three years as security for the loan.

The central government also urges provincial and city governments to provide a certain amount of affordable housing for low income groups by the end of the year, although no specific number of units is specified.

"We welcome the new policy. I believe the measures will be very positive for the Chinese property market in the long-run," said Walter Ng, strategic planning director of Nan Hoi Properties, one of the developers specializing in the luxury property market in Shenzhen.

"For the meantime, only those companies lacking cash and landbanks will be affected."

Ng said Nan Hoi would enjoy an edge over other competitors because his firm has enough landbanks for use over the next three to five years and is in no need of project financing.

However, other property market watchers mostly said they believe the government's new measures will negatively impact the market, at least in the near term.

At Land Power, a real estate consultancy, chairman Michael Choi Ngai- min said the latest measures may dampen short-term investors in light of higher costs and risks of property resale. Choi said flat price increases in Guangzhou and Shenzhen are likely to slow after climbing about 8 percent this year.

A salesman from a US investment bank said the new measures will affect developers in Beijing, Shenzhen and Shanghai the most as they have seen the greatest price hikes during past months.

Shenyin Wanguo Asset Management director Alex Wong Kwok-ying said: "Lots of speculative momentum will be taken out by these strong measures. However, the impact on the China property market in the long run will be limited."

Mainland property stocks dropped an average 5 percent Monday, and Shenyin Wanguo's Wong forecast another 5 percent decline today.

China Overseas Land & Investment shares fell 4.37 percent to HK$4.375, while China Resources Land dropped 6.06 percent to HK$3.875. - by Amy Gu, Raymond Wang,Katherine Ng and Winnie Pang     THE STANDARD    30 May 2006

China to enforce tax to cool property market

China is set to enforce a 12-year-old capital gains tax on property transactions to curb speculation in red-hot real estate markets in major cities, a Hong Kong newspaper reported on Thursday.

Wen Wei Po cited an unidentified source as saying China would apply the previously unenforced 20 per cent tax on capital gains from property transactions on houses sold within two years of purchase, or a tax of between 2 and 5 per cent on the full transaction value if the capital gain could not be confirmed.

When the tax became law in 1994 it applied to sales within five years of purchase. The law will initially be enforced in about 10 major cities, including Beijing, Guangzhou and Shenzhen, that have posted sharp rise in house prices so far this year, the paper said.

China, worried about a property bubble that could destablise its booming economy, has taken a series of steps to cool the real estate sector. The government had also launched a nationwide capital gains tax of 5.5 per cent last June on houses sold within two years. - REUTERS    25 May 2006

Investors Clamor To Expand in China
Foreign real-estate investors are ramping up their activities in China's biggest cities, even though prices have risen and there are signs of a coming downturn.

The thinking is that Shanghai will beat out Hong Kong to become China's financial and commercial center and emerge as one of the world's great cities, on a par with New York and London. Investors in Beijing's hot market believe it will benefit from a pre-2008 Olympic boom.

And most recently, currency speculators have helped boost prices, snapping up real estate as they anticipate that China will ease its currency's peg to the dollar. That would drive the Chinese currency higher and raise the value of the investors' real-estate holdings.

It's a risky game. Skeptics argue that property values are rising too fast, outpacing personal-income growth among China's burgeoning middle class. Since 2000, residential prices in Shanghai are up an average of 85%. At the same time, rents have started to slide. Such an imbalance can't last, says Peter Churchouse, a Hong Kong-based hedge-fund manager specializing in real estate.

The upshot is that property developers accustomed to reaping 6% rental yields in Shanghai now are finding it difficult to eke out 3% to 4% gross, close to what real-estate investors expect in less risky markets, such as New York and London. Rents are unlikely to go up, Mr. Churchouse explains, as properties built to entice middle-class buyers increasingly become unaffordable.

Michael Hart, head of Shanghai research at Jones Lang LaSalle, says he has seen rents fall in apartments ranging between $1,500 and $5,000 per month. In one complex outside Shanghai, rents have dropped around 10% in three months, said David Zhang, an analyst at hedge fund Dynasty Asset Management.

Yet foreign investors are clamoring to expand in China. Although there is no exact calculation of foreign inflows into property, Mr. Hart says the available data indicate overseas investment is growing. In 1995, China real-estate investment totaled $38 billion, with a minuscule portion of that coming from foreigners, Mr. Hart says. By contrast, in 2003, $122 billion flowed into China's property sector, and a 2003 survey by the Shanghai government revealed that 5%, or about $6 billion, came from investors in Europe and the U.S., as well as in Hong Kong and Taiwan.

Shu Yin Lee, who manages a $25 million real-estate portfolio for Grand River Investments, says he isn't worried about having to pay two or three times what he paid in the past to acquire new properties in Shanghai. In his view, higher prices are justified because Shanghai's long-term prospects for becoming a world-class metropolis remain appealing. "In a way, we've taken the 'Real Estate for Dummies' approach," Mr. Lee says.

Many observers expect developers to manage risk by diversifying to other Chinese cities. "One of the reasons people are looking at other places is that the market in Shanghai is too crowded," says Mr. Hart. As for that city, he says, some developers who chose wisely will do well, while those who bought land and developed projects indiscriminately may struggle to see a profit. -  19 Jan 2005   by Laura Santini   WALL ST. JOURNAL 

Chinese luxury property market a high stakes gamble  

Investors in luxury Chinese property are playing a high stakes game, with forecasts for rising prices offset by dire warnings of falling rents, poor sales opportunities and the threat of government intervention.

Few analysts predict a total property market crash in Shanghai because demand for low- and medium-cost housing in the booming city is high. But people who buy luxury flats for a quick profit could end up disappointed.

"A hot-shot in Hong Kong who bought a half million dollar home in Shanghai will find that he can't lease it and he can't sell it," said Peter Churchouse, a veteran Hong Kong-based property analyst who left investment bank Morgan Stanley to run a hedge fund devoted to property.

Shanghai is widely expected to become a major financial centre over the next decade, on a par with London, New York and Tokyo, but at this point there are not enough high-earners to fill expensive apartments.

"It's going to have to go through some cycles and pain to get there," said Churchouse.

While Shanghai luxury residential prices have jumped on average by about 20 percent in the last two years, rents have held steady. In Beijing, villa prices have not moved in the last couple of years but rents have fallen about 10 percent.

And with no sign that the Chinese luxury rental market is set for a quick recovery, Churchouse says property prices are ripe for a fall.

"You can't have prices and rents going in opposite directions for a long time," he said.

Not everyone agrees. Morgan Stanley analyst Kenny Tse says Shanghai apartment prices could rise a further 15 percent this year.

Demand will hold strong, Tse says, while new rules to reduce building sizes and heightened government sensitivity over relocating residents to make way for new projects will squeeze new city centre supply.

REVALUATION, RESALE, REGULATORY RISKS

Speculation is rife, especially in Shanghai. Developers say purchase contracts for some sparkling new 100 sq m apartments doubled in price last year to as much as $550,000 before construction even finished.

A similar apartment in Hong Kong could cost as much as $2.5 million, which is why so many young professionals in the city prefer to buy on the mainland.

But the first test of the luxury market could come if the Chinese government revalues its yuan currency. A survey of 25 strategists last week gave a median 65 percent likelihood China would adopt a more flexible foreign exchange regime this year.

Hong Kong, Taiwan and Singapore business people who bought luxury apartments in China would be tempted to cash in on Chinese assets after a revaluation, which would increases the U.S. dollar value of their investments.

But with the secondary market already weak, finding buyers would be difficult.

Most buyers want new apartments, so the big price rises in recent years have tended to feed through to developers, such as Hong Kong's Kerry Properties and Shui On Land, and Singapore's CapitaLand and Keppel Land .

The divergence between rents and property values has driven rental yields in Shanghai to 5 percent, down from 15 percent three years ago, according to Tse.

That is still above Hong Kong's 3 percent yield for luxury homes, but Tse says he would steer clear of the market.

"I personally wouldn't buy anything in China if it gives less than 7 or 8 percent rental yield," Hong Kong-based Tse said. "The risk is too high."

Tse says investors should be wary of a lack of transparency in China's property market -- reliable data is difficult to find -- and the risks of direct government intervention.

In the last year, the government instituted a series of ad hoc measures to cool the economy, including an attempt to improve property market regulation and transparency. However, the net result was to help drive up land prices.

Beijing introduced land auctions in the place of often shady deals between developers and local governments, put a 6-month moratorium on developing agricultural land and froze bank lending for land purchases.

But analysts say the government is equally capable of bringing in draconian policies that would depress the housing market, such as mass land sales, or alternatively, clamping down on mortgage lending and sharp interest rate rises. ($1=8.276 Yuan) - 1 Feb 2005    REUTERS

China is the world's most attractive place for foreign direct investment 

(FDI), topping the United States for the first time, according to management consultancy AT Kearney's annual FDI confidence survey.

Unease over the state of the world's largest economy and optimism about China's entry to the World Trade Organisation prompted the switch, said the survey, published on  and seen by Reuters on Tuesday.

The study, dated this month, said nearly one in three corporate executives cited China as their preferred first-time destination for investment, more often than any other market.

''Investors in all regions and sectors ranked the state of the US economy as their primary source of unease and biggest likely driver of future investment decisions,'' Kearney said.

Kearney said China's WTO entry, its successful bid for the 2008 Olympics, steady economic growth and stable politics outweighed negative factors such as huge non-performing loans at state banks and a murky regulatory environment.

China attracted US$29.54 billion in foreign direct investment during the firstseven months of 2002, jumping 22 per cent year on year, according to official data.

Other large emerging markets such as Mexico, India and Poland had all dipped in terms of their attractiveness when compared with the last survey, conducted in February 2001.

The United States, Britain, Germany and France rounded out the top five, with Brazil falling to 13th place this year from third last year.

Kearney polls executives from the world's 1,000 top revenue-generating companies annually.   - 2004 October   SOUTH CHINA MORNING POST    

Land Freeze in Beijing
 Clamp on land to hit developers

The latest round of urban redevelopment controls in China may reduce land supply by 20 to 30 per cent, or up to 100 million square metres per year.

The new controls, announced by the State Council last month, could result in real estate investment falling by 200 billion yuan to 400 billion yuan (HK$188 billion-HK$376 billion) a year, representing 3-7 per cent of the mainland's annual fixed asset investment, Morgan Stanley analyst Kenny Tse said.

``Real estate investment as a percentage of total fixed asset investment could fall from last year's peak of 18 per cent,'' he said.

Beijing's decree calling for an immediate freeze on all urban redevelopment projects would cause a significant slowdown in supply of new land in the medium term and significant negative earnings revisions for some developers.

``Based on past experience, we believe most relocation projects will face a delay of at least 18 months. Local government officials are likely to be extremely sensitive in granting permission for redevelopment/relocation projects due to the accountability risk,'' Tse said. ``Only a handful of projects may slip through if previous approvals were granted.''

His comments came after the State Council issued strict nationwide guidelines on relocation/redevelopment projects on June 15, which are intended to reduce supply, slow down real estate investment, maintain social stability and cut down on dubious practices in the property industry.

The policy was announced ahead of the end of a six-month moratorium on land auctions in October.

The measures should be effective in easing over-investment in some parts of the property sector and add weight to the austerity programme which began in August 2003, Tse said.

Tse believes the combined effect of tighter credit, a freeze on land supply and curbs on the sale of uncompleted properties in the secondary market in Shanghai will accelerate industry consolidation in the near term. ``Smaller less-capitalised developers will either face an exit or seek partners with stronger balance sheets to remain in the game. Larger developers will likely seek merger and acquisition opportunities for land replenishment in the absence of land auctions,'' Tse said.

Winners under the new conditions are likely to be companies focusing on mass-residential development away from city centres and hence not requiring heavy relocations, he added.

``In the context of Shanghai, the losers appear to include Shui On Land, HKR International and China Resources Land as they all hold key projects in the city centre, which still require extensive relocation, in our view,'' Tse said.  - by Eli Lau    HONG KONG STANDARD    2 July 2004  

No property market collapse, says China
Housing prices will continue to rise but at a gradual pace

(HONG KONG) China's Ministry of Construction has moved to allay fears of a collapse in the mainland's booming property market, saying prices would continue to rise at a gradual pace during the rest of the year, South China Morning Post reported yesterday.

Xie Jiajin, the ministry's property department director, said on China Central Television on Sunday the sector was 'returning to a rational path'. There was no possibility of a collapse in the market, she said.

Ms Xie said she had observed from her own investigations that 70 per cent of the flats in new property projects released this year were taking a month to sell. She described this as a 'reasonable' market response. What happened last year, when people queued up for flats two to three days before they went on sale, was abnormal and needed to be corrected, she said.

Ms Xie's remarks came after recent figures showed a slight easing in growth in property investment and prices. Investment in the property sector from January to May rose 32 per cent year-on-year to 370 billion yuan (S$76.6 billion). That rise was 2.6 percentage points lower than the increase in the January-April period.

The property development investment index, a measure of activity in the sector released by the National Statistics Bureau, was at 106.53 for May, down 0.62 points from April.

The total area of newly developed land across the country in the first five months was up 19.8 per cent year-on-year to 64.8 million square metres - 12.4 percentage points lower than the increase from January to April.

Developers broke ground on 225 million sq m of residential and commercial housing during the period, up 18.7 per cent over the same time last year but down 0.6 percentage points when compared to growth from January to April.

Still, the cost of housing in the first five months of the year was 2,708 yuan per sq m on average - up 10.6 per cent over the same period last year. The average price of residential accommodation in Shanghai and Beijing was more than 5,000 yuan per sq m, the highest in the country.

Ms Xie blamed earlier price increases on speculative buying. She predicted residential property prices would grow steadily in the coming months, pushed by strong demand from people buying properties to live in rather than for speculation. But there would be no big fluctuations, she said. China began introducing policy changes at the beginning of the year to rein in the rapidly developing sector. The measures were aimed at tightening loans extended by banks, controlling land supply and restricting house demolitions.    - July 6 2004    SINGAPORE BUSINESS TIMES

China's efforts to rein in its housing boom may take the steam out of a rally in Hong Kong-traded property developers such as New World China Land, whose shares have more than doubled from a record low in April.

Around Asia's Markets: Beijing clamps down on property

China's efforts to rein in its housing boom may take the steam out of a rally in Hong Kong-traded property developers such as New World China Land, whose shares have more than doubled from a record low in April.

China has begun limiting building approvals and land supplies and in June told banks to restrict property lending. Real estate investment surged by a third in the first eight months of this year to 557 billion yuan, or $67 billion. Top officials have expressed concern that an overheated market, left unchecked, could damage economic growth.

"There are innumerable signs of an unsustainable boom in real estate in China, especially in Shanghai," said Robert Zulkoski, chief executive of Colony Capital Asia.

Property prices are in need of "serious correction," he said in an address to the Asia Society in New York.

New World China, China Overseas Land Investment, Henderson China Holdings and other developers, have bet that investment spurred by China's entry into the World Trade Organization two years ago, plus the 2008 Olympics in Beijing and the 2010 World Expo in Shanghai, will keep the boom going.

"We are keen on the mainland because the economy is robust, the population is large, the demand is high and the people are becoming more affluent," said Chew Fook Aun, chief financial officer of Kerry Properties.

Many investors agree. Shares of New World China, a unit of the Hong Kong developer New World Development, have risen 163 percent since April 28, when the stock reached a record low during the SARS epidemic. New World China has assets of more than $2.6 billion on the mainland.

China Overseas Land, an arm of China's ministry of construction, has climbed 82 percent during the same period, while Henderson China Holdings has jumped 50 percent.

Those gains exceed the 34 percent rise in the Hong Kong benchmark Hang Seng index in the same period.

In Shanghai, where house-hunting has become a weekend obsession for many residents, home prices have risen as much as 50 percent in the last two years, according to property consultant Colliers International.

But the property boom has alarmed Beijing. The central bank governor, Zhou Xiaochuan, said last month that runaway credit and excess money flowing into real estate could create a bubble. Analysts fear that the already fragile banking system would be undermined if a subsequent collapse in prices caused borrowers to default.

Since last week, commercial banks have been required to keep more reserves on hand to back deposits, a move that the central bank estimates could drain about $18 billion from the financial system and reduce funds available for lending.

The government has also said it will limit construction of luxury homes to prevent rising housing prices from stoking inflation and told banks to finance construction rather than land purchases.

As a result, the developers stock prices might already have seen their best days.

"All the measures on credit and supply, the effect of which may start to take hold later on, may be negative on property prices," said Eric Wong, an analyst at UBS Securities Asia. "A lot of the rebound in property stocks may have taken place already."

Chinese property is "a high-risk area," according to Agnes Lee of Standard Poor's. "There are high regulatory risks, low transparency, and the profit margin is very uncertain."    - By Jasmine Yap and Jianguo Jiang Bloomberg News    September 29, 2003

Graft in China real estate fuels discontent
Minister hits out at developers, city planners over graft, forced relocations

BEIJING - A senior government official admitted yesterday that China's overheated and chaotic real estate market was riddled with corruption, demolitions and forced relocations, fuelling social discontent.

Construction vice-minister Liu Zhifeng also told journalists that up to 29 per cent of commercial housing in China remained vacant, investment into the sector was too hot and property development was too dependent on bank loans.

'At present there is indeed a great deal of corruption in real-estate development especially in the relocation of people and in city planning,' Mr Liu said at a press conference. 'In some places this is relatively serious.'

He blamed developers and local city government planners, saying they had not met the needs of the market when planning residential development and had 'blindly' undertaken projects that were well beyond the financial capacity of ordinary Chinese.

Developers and city planners also refused to follow regulations in demolishing old homes, relocating citizens and paying compensation, a situation that has caused widespread discontent, Mr Liu said.

'The relocation issue is an area where people have made the most complaints. In some cases this is a very serious issue and the State Council has placed a lot of concern on settling this,' he added.

In the past few weeks, at least two people have publicly attempted suicide over government relocation policies, with a disgruntled man from central Anhui province attempting to set himself on fire in front of the portrait of revolutionary Mao Zedong on central Tiananmen Square on Monday.

According to the National Bureau of Statistics, real estate investment in China rose 33 per cent to 556.6 billion yuan (S$118 billion) in the first eight months of 2003, with growth in investment in August falling some 6.6 percentage points from the previous month.

State press reports indicate there was a yearly increase in investment of 20 per cent from 1998 to 2002.

Last year, the gross volume of individual housing consumption and building expenses totalled 800 billion yuan, of which 450 billion yuan was tied up in building and selling commercial homes, Mr Liu said.

He said that in 2002, 25 million square metres of new housing came onto the market, increasing the total commercial housing to 285 million square metres.

As of end-July, 97 million square metres remained unsold, or approximately 29 per cent, but of this, Mr Liu said, more than half had been on the market less than a year and were difficult to consider as vacant housing.