China property bubble debate raging

Debate is heating up in China about whether the booming property sector is a bubble in the making. Economists are voicing worries that loose monetary policy, and heavy spending, are inflating a bubble that upon bursting could wreak financial, and even social trouble.

One of the most eye-catching sectors in China, amid the strong economic recovery, is a fast growing property market. The rise is so swift that a fierce debate is running over whether this is one of the most important pillars of the country's economy, or if it's akin to a time bomb that could threaten future growth?

China's housing prices have been rising at an unexpected pace since March. This has encouraged developers to break ground on new projects. Real estate investment is up 18.9 percent, annually, in the first 10 months of the year. November, traditionally a slow month, has been busy with consumers front-loading purchases before a value-added tax exemption expires at end of the year.

While some industry insiders say the market boom reflects genuine demand from end users, and think the government should increase supply, many scholars are casting doubt on that theory.

Zuo Xiaolei, the chief economist at Galaxy Securities, completely refutes the notion. She says property development is far outstripping end-user demand, and prices are not affordable for ordinary citizens.

Zuo adds that the wild rally is being boosted through investment needs propelled by a banking sector lending boom.

Her worry is echoed by many economists, Central Bank advisor Fan Gang also says China is one of the world's emerging markets facing property sector bubble risks. Independent economist Xie Guozhong says the spike in real estate prices is being driven by conditions that create bubbles, including aggressive bank lending, and low down payment requirements.

Figures show that new loans to fund property building activities surged 120 percent in the first half, compared to a year ago. Housing mortgages more than doubled during the six months of 2009 as well.

Another piece of evidence is wasteful investment in the industry. Zhang Xin, chief executive of Soho China, says that in Shanghai's central business district, Pudong, vacancy rates are as high as 50 percent.

Meanwhile, new skyscrapers continue to be built.

The growing risk factors are pushing the government to take action aimed at preventing the market from becoming a bubble. Industry insiders say policies to rein in the soaring property sector, and fine-tune the economic growth structure, are expected in the near future. Some also believe the market will experience a correction next year.