China's looming property bubble

China's banks were creating a growing pool of hidden credit risk through financial moves that shift loans off balance sheets to comply with government capital requirements.

Permitting banks to transfer all of the credit risk to third parties shields them from the consequences of bad credit decisions, which over time could foster the same type of recklessness witnessed with the securitisation of subprime loans in the US.

State involvement

Recent transactions of two major state owned enterprises raised serious concern of state involvement, possibly to protect banks, "favoured" developers, and other SOEs facing serious risk in the property market.

A Sinopec subsidiary purchased a major complex comprising apartment blocks, office towers and underground car parks for less than 50 per cent market price sparking outrage from homeowners and developers fearing plunging asset values.

After several months of contradictory excuses, a statement claimed the transaction was a debt for asset transaction with the developer of the complex. That complex however, was reportedly substantially unoccupied, burdened by heavy debt and incurring serious holding charges. The explanation raised more questions than answers in respect to omissions, pricing, developer, bank and individuals involved. Further reporting ceased.

China's major construction and engineering company purchased an apartment development site, setting a new record price for the Shanghai property market. State media immediately trumpeted the record deal:

... as a clear sign that Shanghai property values were still rising and would have a positive impact on Shanghai's future property market.

... analysts speculate that the deal could singlehandedly underpin apartment prices in what is already one of the nation’s priciest and most closely watched real-estate markets.

The purchase was unusual in that it blatantly ignored Beijing's demands to cool home prices in the regional centres, there was no competition, and timing and location were unusual.

Developers were experiencing falling demand and values, and the land was in low priced Yangpu, well outside the price setting Shanghai CBD and Pudong district. Further reporting ceased.

State statistics and media

Knowledge of the five-year plans, bank lending, the stimulus package, relocations, ethnic policies and Beijing's projected image, is essential.

Breaking up the statistics into regions can reveal interesting facts in determining the real impact of overall housing in 2009-2010 economic growth. Property development is a major contributor to regional GDP growth. It also provides:

1. rural housing for millions who have been displaced by Beijing's mega projects;
2. apartments for Han Chinese migrants in ethnic majority regions; and
3. low cost ethnic housing resettlements.

The first relates to projects including the Three Gorges Dam (3GD), the Olympics, the South to North Water Diversion Project (SNWDP) and others.