Wen Jiabao paid an unusual visit to the city of Wenzhou during the recent national holiday. Accompanied by the head of the Peoples Bank of China, the finance minister and other senior officials, China’s premier went to assess the surge in informal lending to the city’s 450,000 small consumer product and export companies as well as property developers, many of which can no longer get cheap finance from state-owned banks and are failing. With property prices in the secondary market down 10 per cent since June, Wenzhou’s problems shed light on China’s newest economic problem – a faltering property market.
What happens if the 13 per cent of GDP accounted for by property investment stalls or falls? Property is one of the main symbols and causes of urban wealth and is a key driver of industries including cement and steel. Property developers in China are faced with a fall in prices and transaction volumes, which in 20 big cities are about a third lower than a year ago. Depressed share prices are fueling fears that the property bubble is about to burst.
The good news is that China managed a property slowdown successfully in 2004 without far-reaching macroeconomic consequences. And the bubble story assumes, often mistakenly, that local anecdotes of speculative activity and oversupply are national. It also ignores rising household incomes, urban house price-to-income ratios and rising demand for new and refurbished homes. A shake-out of weak developers and property assets, and some recapitalisation of banks are all manageable.