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Has The Chinese Real Estate Bubble Begun to Burst

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Chinese real estate slowed in the first two months of this year, while sales were down year-on-year from a year previously, according to official data released on Thursday. The Chinese economy, that once generated panicky headlines in August journals like the Economist and the WSJ, has been slowing now for some time, but the knock-on effect from a cooling property market could impact industries as diverse as cement and furniture. That has serious implications for a country where leaders are trying to juggle economic reform with maintaining economic growth and full employment.

We’re currently seeing the first slowdown in the acceleration of house prices for over a year, a strong sign that the market as a whole is cooling.

Real estate investment rose 19.3% January-February from a year previously, which is slower than the 19.8% annual growth rate in 2013, the National Bureau of Statistics said. That means that while the property market has been acting as a parachute for the Spanish economy and an engine for the American economy, it’s currently working as a dead weight for the Chinese property market.

Property sales dropped 0.1% measured by floor space, and 3.7% in terms of value, in the year’s first two months. That doesn’t sound too catastrophic, but it’s a sharp turn for a market that saw a 27.4% slump in the first two months of this year compared with growth of 13.5% in the same period last year. The Chinese economy as a whole is undergoing a slowdown, with the flow of aggregate financing dropping away 2.5% in January and February from its 2013 equivalent, according to the People’s Bank of China.

Nicole Wong, a property analyst at CLSA investment banking, said that the situation was largely caused by oversupply, which ‘has a greater bearing on slowing down the property market this year.’

The Chinese property market has been deliberately cooled over the last two years after a period of red-hot boom that saw entire cities built, sold to investors but almost empty. From one side, pressure from local governments has forced down demand, and simultaneously banks are tightening lending to the property market. A third source of pressure has now been added to the mix, though: ‘the current liquidity tightness is unlikely to last into the second half, because economic growth isn’t that great,’ as Ms. Wong points out.

Central government has been supportive of these measures and Beijing will be pleased to see a mild cooling in a market that it’s been struggling to contain for over four years. But that runs the risk of an ‘over-correction’ – a sudden sharp downturn in property that could drag the Chinese economy down after it.

The Chinese plan has had to be locality-based in a country so large and differentiated. Central government will continue to try to curb speculative demand and employ policies tailored to China’s different cities and zones., the country’s premiere, Li Keqiang, reiterated on Thursday. State media quoted Vice Housing Minister Qui Baoxing as saying that there’s no chance of China’s housing market having a major crisis within the next two years. That doesn’t chime with the opinion of Nomura Holdings economist Zhiwei Zhang, who pointed out that ‘a sharp slowdown in property investment is possible and would increase systemic risks.’

Les Calvert is the owner and CEO of many internet property and travel related websites including this overseaspropertymall.comand he regularly writes news and articles for his websites, trade magazines and newspapers.