Chinese Analyst Warns of Real Estate Crash

December 24, 2009 Updated: May 26, 2010

In the wake of Dubai’s debt crisis, wary analysts are closely watching China’s real estate market for signs of a similar crash. Among the more pessimistic observers is Chinese commentator Shi Hanbing who warns China to prepare for the imminent burst of the real estate bubble.

In his December 18 blog post titled “China Should Prepare for a Real Estate Crash,” Shi compares China’s current situation to Japan before the disastrous crash in the early 1990’s, and identifies alarming similarities between the two economies.

Shi attributes the burst of the Japanese asset price bubble to three factors: speculation and over investment in real estate, excessive issuance of loans, and a population structure change. All three, according to Shi, are characteristic of today’s Chinese economy.

Shi believes that the coming Chinese crash would be more catastrophic than the one that shattered the Japanese economy two decades ago, because China is more fragile without the advanced technology and a relatively wealthy populace which enabled Japan to survive the crash.

Speculation and Over-Investment

According to Shi, recent years have seen a huge gap between the profits in the real estate market and other industries in China. Shi says that the profit gap has been further widened by the increased tax rates that local governments imposed to raise stimulus funds for the central government. The razor thin profit margin has inevitably driven large amounts of capital to the lucrative real estate market, which blew the bubble even bigger.

He expresses his concerns on the excessive influx of capital into real estate from other industries as well as public wealth. “If the [financial] foundation of manufacturing industries is shaken … how can a real-estate-reliant China handle the fluctuations, or even a crash, of the real estate market?”

Excessive Issuance of Loans

Shi adds that similar to pre-crash Japan, China has been relentlessly granting loans since the government’s stimulus plan began. In the first nine months of 2009 alone, China issued loans totaling RMB 8.67 trillion yuan (US$1.27 trillion). Though it is not known how much of these loans have been pumped into the real estate market, he suggests the amount should be huge considering the high number of land sales in China’s major cities during the same period of time.

Population Structure Changes

Shi notes that Japan’s falling birthrate after the baby boom generation also contributed to the burst of the real estate bubble. He reminds readers that China’s birthrate has been declining rapidly over the past decade, a fact that many have ignored. “In ten years when the population structure is drastically different … and excessive housing floods the market,… who will be there to support the real estate bubble and the illusionary prosperity built on this bubble?”

Shi concludes his blog by criticizing interest groups who eulogize the real estate market growth while hiding its dire prospects from the public. “Remember, China lacks Japan’s two pillars (technology and wealthy populace), and is therefore very vulnerable to a real estate crash,” he warned. “It is high time to give some serious consideration to these issues.”

Shi’s prediction of a damaging real estate crash is echoed by many analysts both inside and outside China, such as Chinese economist Cheng Xiaonong. In a recent interview with New Tang Dynasty TV, Cheng commented on how abusive loan granting has accelerated the growth of China’s real estate bubble. Cheng also pointed out that once the public starts to panic as the crash surfaces, the Chinese government would close the banks by force in order to stop a massive cash withdrawal, and as a result paralyze China’s entire financial system. When that happens, Cheng said, no foreign businesses in China would be able to extricate themselves.

Read the original Chinese article