The Chinese real estate market is taking on a strange development trend. The upsurge of house price triggers the worries about the stability of the market.

In the first half of 2009, the performance of Chinese real estate market really shocked many people. In March it was still as depressed as the end of 2008. Then drastic changes happened. The areas of sold houses increased rapidly and so did the house price. The house prices in the major cities like Beijing, Shanghai, Shenzhen and Guangzhou all saw drastic increase, and the experts, undoubtedly, were shocked.

The National Development and Reform Commission (NDRC) and the National Bureau of Statistics (NBS) issued the data about the house price in 70 large or middle cities in China. In June the average house price in these cities increased by 0.2% year on year, putting an end to the six straight months negative increase in house price started from December 2008. It was also the fourth straight month in which the month-on-month increase in house price happened. From this March to June, the month-on-month increase of house price was respectively 0.2%, 0.4%, 0.6% and 0.8%. In addition, nearly all the cities in China saw the increase in their house prices.

The data about the performance of the Chinese real estate market showed that the total areas of sold houses in China from January to June was 341.09 million square meters, up 31.7% from the same period of last year. The sales amount accumulated to 1.58 trillion yuan (USD 231.33 billion), with the year-on-year increase of 53%.

In correspondence with the drastic increase in house price, the land price in the first-tier cities continuously broke the highest record. In June many people saw or heard different pieces of land in different cities be sold at shy-high prices. “A war for land” was hotly going on.

It is only half a year after the bursting of the bubble in the real estate market. Most people have not forgotten the depression of the real estate market at the end of 2008. The impact of the financial crisis is not gone. The background for Chinas economy to rebound is not solid enough. The upsurge in the house price is harmful.

Primary Concern – Peoples Livelihood

Extremely high house price may affect peoples lives and depress the domestic demand.

The upsurge in house price brought the enthusiasm in the land development, the increase in investment and of course, the economic growth. However, it also depressed the urban residents consumption and brought negative influence upon the enlargement of domestic demand. The exorbitant house price forces the buyers to assume great burden from housing loans. They have to pinch and scrape to save money to repay the loans. Therefore, they have no extra money to buy the other things. As mentioned in the 2008 Blue Book of the Chinese Academy of Social Sciences, the upsurge in house price oppressed the consumption in other aspects

The Peoples Bank of China (PBOC), or the central bank, made a questionnaire in 50 cities at the end of May. The result was opened to the public on June 12, telling us that urban residents generally have weak will of buying houses. More than 60% of residents thought that the current house price was too high to accept. 47% of the urban residents chose to save more money in the banks, increasing by 9.5% from last quarter and hitting the historical high. Only 15.1% of urban residents said they would make more consumption, which was 14.6% lower than the previous quarter and the lowest point in the history.

The national economic growth depends on the driving force from investment, consumption and exportation. Against the background of financial crisis, Chinas economy was discovered to have the problems of unbalanced GDP structure and high dependence degree of foreign trade. On July 16, the spokesman for NBS said in a press release that the contribution rate of the investment to the economic growth in the first half of 2009 was 87.6%, driving the GDP to grow by 6.2%; the contribution rate of final consumption to the economic growth was 53.4%, increasing the GDP by 3.8%; the net exports contribution to the economic growth was -41%, pulling the GDP growth down by 2.9%. Since the foreign demand has been impaired, China is crying for the increase of domestic demand to offset the negative influence from the foreign demand. The key to enlarging domestic demand is to stimulate the increase of consumption. The extremely high house price, whose crowd-out effect has affected peoples daily lives and consumption, is the largest resistance to consumption incentive.

Secondary Concern – Development

The extremely high house price may result in the unbalance of the industrial development and damage the base of sustainable development.

The heat of real estate market was reflected in the land market. The real estate enterprises became more and more passionate in acquiring the land. From May to June, the record of highest land price was broken for 10 more times. According to the latest information of land trade, there were 533 land deals done in the 60 Chinese main cities in May, up 73% from last May. The involved land covered 26.86 million square meters, up 89% year on year.

Many experts thought that the crazy increase in land market lacks the support of macroeconomic situation and is not well established. This may become another real estate market bubble. After the appearance of highest land price in Beijing, the experts said: “The price was too irrational to be understood.”

Whats more worrying are the companies which helped to bring about the sky-high land prices. The companies buying the land in Beijing, Shanghai, Guangzhou and Shenzhen were all listed companies or their shareholding companies. Some of them are even the famous state-owned enterprises and not the mainstream enterprises in the real estate industry.

When more and more textile and pharmaceutical enterprises enter the real estate market through buying land, Chinas industrial structure and economic sustainable development are becoming more and more worrying. The economist Li Kaifa said: “In recent years, Chinas private enterprises are haunted by the low profits and poor return on investment, which is lower than 3% in some industries. Such a poor return on investment brought about two problems: the first one is the less satisfying enterprises benefits, because of which the banks are less willing to lend loans to them; the second one is that the investors, who suffered from the low return on investment, may take away part of their capital to join in the investment and speculation in the real estate market. For example, Haier and Hiscence, which were previously specialized in electronic appliances, subsequently joined in the real estate market. This showed that the enterprises specialized in real economy began to count on the investment and speculation in real estate to earn profits.” The overheated land market and the upsurge of house price, in Li Kaifas opinion, are attributed to the fact that the real economy and social capital can not find any projects which can maintain or increase their value in all industries except for the real estate market. The extremely high house price makes the investors in the other industries see smaller yield and bigger risk, forcing them to put money in the real estate with large profits and low technological threshold.

It is true that the real estate market which is related with many key industries plays an important role in keeping economic growth. However, the pulling force of the real estate for the economic growth is not everlasting. In order to consolidate the base of economic rebound and to make the sustainable development more accessible, the government must take more measures to change the economic structure. The industrial balance can only be realized when the fixed assets investment is properly guided. In that way, Chinas economic development can keep a healthy and stable condition. It is not a good matter that many entity enterprises entered the real estate market.

Third Concern – Risk

The extremely high house price increases financial risk for the banking industry.

In recent years, the housing loan is considered to be a high-quality credit project in the Chinese banking industry. Various banks conducted m alignant competitions with each other to control this business. They continuously lowered the requirements of getting the loans and multiply enlarged the amount of housing loams. The data from NBS showed that the Chinese real estate developers fund for this year was 2.37 trillion yuan (USD 346.78 billion), with a year-on-year increase of 23.6%. Hereinto, the amount of domestic loans was 538.1 billion yuan (USD 78.7 billion), up 32.6%; the utilized foreign capital was 24.3 billion yuan (USD 3.56 billion), down 29.7%; the self-financing capital by the enterprises was 824.1 billion yuan (USD 120.5 billion), up 10.4% and the amount of other capital was 983.7 billion yuan (USD 143.9 billion). The other capital included the earnest money and received advance payment with the amount of 575.8 billion yuan (USD 84.3 billion) and the 27.7% year-on-year growth rate, as well as the 282.9-billion-yuan (USD 41.4 billion) individual mortgage loan with the year-on-year growth rate of 63.1%. According to the data of the Peoples Bank of China, 7.37 trillion yuan (USD 1.07 trillion) credit loans were totally added in this year, 538.1 billion yuan (USD 78.7 billion) of which flowed into the real estate development field.

There is a big risk hidden behind the housing loans outshining all the other credit businesses.

Compared with the foreign countries, the credit loans take an overlarge proportion of the capital for the real estate development in China. The enterprises self-owned capital is not sufficient. Most of the risks in the real estate market are assumed by the financial institutions. Currently 50% of the average capital for the Chinese real estate development comes from loans. In some large cities the proportion even reached 80%. The risk assumed by the banks is enlarging with the increasing house price. Once the house price sees a drastic decrease, the financial crisis in property is inevitable.

The financial crisis in the USA was derived from the bursting of the bubble in the real estate market. This is a warning for the Chinese people that they must watch out the risk in housing loans anytime. With the loose credit policies, the commercial banks must need to hold the principles of house loans and keep a clear view of the risk in real estate market. They must carefully review each kind of housing loans and put strict control over the quality of the loans. During the period of house price upsurge, the banks should play the role of stabilizer instead of a promoter.

Recently the China Banking Regulatory Committee (CBRC) published the Notice of Further Improving the Risk Control over the Mortgage Loans, pointing out that the banks should stick to the policies concerning the loans of the second residence against the large wave in the real estate markets in some areas. On July 17, the CBRC held a “Briefing for the Third Financial Situation in 2009”, in which its chairman Liu Mingkang listed the risks in real estate market as the new risk points for the banking industry and required all the financial institutions in China to enhance the risk control. The bottom line of the provisioning coverage ratio must be stuck to and will be trebled by the end of this year.

The fast increase of the house price made the discussion about the bubble in the real estate industry more and more furious. Keeping the house price stable is listed in the agenda again. How to keep the balance between the house price and initiative buying power? How to make the healthy development of real estate become the important supporting power for the economic recovery? How to accelerate the construction of the housing security to make sure that the poor people have their own houses to live in? Those are the real problems which need to be solved for China in the second half year. Now the Chinese economy is in the key period of stability towards good. The performance of the real estate needs to be paid close attention.