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EDITIONS
 Friday, 3 January, 2003, 11:18 GMT
China's property bubble risk
Properties along a Shanghai street
Vacancy rates are reaching record levels

Top government leaders and state media in China fear the country's real estate sector is overheating, leading some to talk about the threat of a property bubble.

If the real estate bubble is supported by bank loans... the real estate bubble may turn into a banking crisis

Justin Lin, Beijing university
Economists say there is soaring investment in the sector, leading to fears of a similar bubble to the one that fed into the Asian financial crisis of 1997.

Vacancy rates are also reaching record levels.

The country's prime minister Zhu Rongji has already said Beijing needs to take steps to curb the trend.

Potential crisis

Professor Zhang Hongming, a specialist on the real estate industry, says that what is happening in China is a swing from one extreme to the other.

"You have to link this problem back to the late 1990s when there was under-investment in real estate and the supply failed to meet the demand," he said.

"I think the overall situation in China's main cities is developing quite normally but if you want to use the word 'bubble', you could apply it to the situation in certain places."

But Justin Lin, a senior economist at Beijing university is worried that a sharp rise in both investment and vacancy rates is a sign of overheating and has the potential to wreak havoc on the Chinese economy.

"If there's a bubble and the bubble bursts, it will have a large impact on the whole society.

"Especially if the real estate bubble is supported by bank loans then, under the current situation, the real estate bubble may turn into a banking crisis."

Cooling effect

Mr Lin said it was crucial that the government strengthened and implemented banking regulations on the amount a bank can lend to support real estate.

And there are other factors that might help cool down the market according to Albert Lau, managing director in Shanghai of the international real estate company FPD Savills.

Mr Lau gave the example of the personal tax deduction for buying a home which will end in May 2003.

"The government has said it will be stopped because basically that measure was there to stimulate demand and they will stop it because demand is there already," he said.

Catalyst

He said that as China's economy evolved, the government had to decide how much to intervene and how to do it.

He believes the market should be more self-regulating in the longer run with the government acting as a catalyst only when it is very necessary.

"I think the Chinese government is learning to do that," he said.

"Compared with five or six years ago they've reduced their sort of ad hoc comments to the market but still there are some.

"So far it hasn't caused much concern to the market, but sometimes the Chinese government needs to be alert, because to them it's a new market."

Whether or not China's overheated real estate sector amounts to a bubble, the government's handling of the situation will be closely watched - especially with Zhu Rongji expected to hand over the economic reins early in 2003 to his deputy and likely successor, Wen Jiabao.

  WATCH/LISTEN
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  The BBC's Francis Markus
"How the government handles the situation will be closely watched"

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30 Dec 02 | Business
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