Bubble fear grows after Dubai crisis

08:23, December 03, 2009

Anxiety over Dubai's debt crisis may be easing on Wall Street and bourses throughout the world, but it's just starting to swell in China, as some analysts say the nation's economy is similarly dependent on booming real estate and infrastructure.

Dubai has fallen about $80 billion in the red, primarily from Dubai World, a state-run property conglomerate that accounts for about $59 billion of the debt, much of it from its real estate developer, Nakheel, creator of the Palm Islands. Dubai World plans to postpone repayments for at least six months.

It helped ease fears with plans to renegotiate several billion dollars worth of obligations, but not entirely.

Analysts and economists are split over whether today's Dubai foreshadows tomorrow's China. Some are attempting to ease fears on the growth while others warn of dire consequences if action isn't taken now.

"As China's real estate bubble continues to grow in size, a crisis similar to that in Dubai is likely to take place in China, and the impact could be much more devas-tating," warned Yi Xianrong, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Science.

"The shocking news sets off a big alarm in China - that any economy that's excessively reli-ant on real estate will collapse like Dubai," said Shi Hanbing, director of Shanghai Security News' opinion desk and a popular financial commentator, who was relaying opinions of Huang Weiping, an economist at Renmin University of China.

According to statistics from the central bank, Chinese banks have lent 6.21 trillion yuan ($909 billion) to the real estate sectors. The figure would be larger if private financing were taken into account.

"Chinese scholars believe that the local government's debt will be more than 13 trillion yuan," Shi said. "This does not include the debt of the State government."

Together with the government's 4-trillion-yuan stimulus package, "China will become a country with the craziest infrastructure investment, which would almost certainly result in huge amounts of bad loans, like what happened in the 1990s," Shi said.

"The US housing market collapsed because of trying to boost its economy with real estate; Japan's housing sector also collapsed for the same reason. China will have the same fate if it relies upon real estate development," Shi again quoted Professor Huang as saying.

The roaring market has been sounding alarms to Premier Wen Jiabao, who called during his visit to Shanghai on Sunday for the containment of speculative purchases of homes and for the promotion of healthy development of the real estate industry.

"We should give priority to the construction of affordable houses and provide extensive financial, fiscal and land support," he said.

Shanghai's housing prices have grown to a record high. By the end of October, the average price per square meter was 17,360 yuan, up 40 percent over the same period last year, according to China News Service.

Some real estate in Pudong District is selling for 70,000 yuan per square meter, and each home will cost more than 10 million yuan.

Housing prices in Beijing have topped 70,000 yuan a square meter in urban areas, with the average price standing at 16,000 yuan by the end of October, up more than 50 percent, year-on-year.

According to government statistics, employees in Beijing earned an average annual income of 44,715 yuan last year.

The prices are comparable with those in Dubai, where the record high was nearly 30,000 yuan, up from 8,000 yuan in 2001, media reports said.

"The bubbles are growing at a dangerous rate in China, as the country has the world's largest housing-price-to-personal-income rate, the lowest rental-profit rate, and the highest rate of unsold houses," said Niu Dao, an independent real estate market commentator widely quoted by the country's financial media.

The government policies, including tax breaks, low interest rates and smaller down-payment requirements, have led to an increase in property deals.

China's housing bubble can definitely bring harm to the country's macro-economy, Chen Yunfeng said. "It could possibly destroy the whole financial system and upset social stability."

Chen Fengying, director of the Institute of Global Economics at China's Academy of Social Sciences, said the development of the real estate sector should correspond with the development of China's economy.

"Dubai's mistake is that it overestimated people's purchasing power," Chen Fengying said.

However, Yang Hongxu, R&D Institute director for E-House China, said China and Dubai's real estate market are both developing too fast, but they also have fundamental dif-ferences, according to Xinhua.

Dubai's crisis was triggered by the excessive borrowings of "hot money" to its real estate industry, and the projects might not be completely consumed locally; whereas China's developers are financed through bank loans and bonds, without involving hot money. And the majority of the houses were bought by people for residential use, with a small part for resale.

Ding Yifan, a researcher at the Development Research Center of the State Council, told the Global Times that the bubble wouldn't burst in a short term thanks to the government boosting the housing market.

However, he noted that the government is facing a dilemma between promoting economic growth and providing its people with affordable housing.

Zhang Jianxin, a real estate appraiser in Beijing, told the Global Times that the government would not intervene in the real estate sector, but rather use financial levers to adjust the market.

Source: Global Times