China property bubble poised to pop

China's real estate investment was up 32 per cent in 2011.

Economists warn that China’s property bubble could pop, resulting in a worldwide economic downturn, if current building and valuation continues.

Writing in the Philippine Daily Inquirer, former secretary of the Department of Trade and Industry Cesar Batista says China’s economic boom is wrapped up in real estate that is underutilized and does not provide long-term economic benefits.

China is expected to have grown by 9 percent last year, but real estate investment was up 32 per cent.

Most Chinese have to invest in state-controlled banks, which have interest rates lower than inflation, but wealthy Chinese invested in property on the ground floor, and have seen huge real estate returns. Prices have tripled over the past five years.

But need may not have corresponded to growth: many buildings in commercial and residential areas are empty, Batista says. New infrastructure projects are underutilized—triggering nervousness about the bubble. As long as construction continues, it creates jobs for the ordinary people and wealth developers.

The government is trying to deal with the debt-fueled real estate boom as part of its five-year plan, Batista says, but it will be delicate.

“If China’s bubble bursts, there will be less demand for goods and services (from both imports and locals). There will be less demand for raw materials, minerals—a steep drop in commodity markets, global trade in general.

China will do good in managing the decline of its economy to avoid a hard landing, which will not be allowed to happen before the change in its leadership in 2012,” Batista’s article warns.