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Chinese Property Investors on Alert

The data out of China's property markets have been robust. Not only were transaction volumes up 60% in value and 37% in area in the first half, but investment rose by 11.6% between January and July to US$171 million. New construction starts still fell in the January-July period, but by 9.1%, a slower rate than the 10.4% decline in the first half. Property prices, meanwhile, rose 1% in July from the previous year, higher than the 0.2% increase reported in June.

But there are concerns that this bank loan-driven property revival, rather than having the potential to form the foundation for sustainable economic growth, is merely a sign of a coming property bubble. While analysts acknowledge the risks, they say the underlying picture of the property market this year is strong. "This strong sales rebound for the first half actually included quite a lot of the release of pent-up demand," said Carol Wu, an analyst at DBS Vickers in Hong Kong. "This will gradually fade away... [but] a slowdown in transaction volume doesn't mean that there's no recovery in the market."

Nevertheless, this may change if and when the central government ends its policy of relaxed credit. And if it is maintained, regulators can apply the brakes in other ways. Already, the China Banking Regulatory Commission has said it will strictly enforce a rule on second-home mortgages, requiring down payments of 40% of a property's value; in practice, that percentage has often been reduced to 30%. Moody's Analyst Kaven Tsang noted in a recent report that regulators have already told state-controlled banks to better manage the quality of their loan books.

"One thing that we always caution [about] is the recurring cooling measures that will pop up from time to time," said David Ng, head of regional property research at RBS. "And the warning signs are of course if property prices rise too quickly, then the authorities will start to warn about overheating the market."

Analysts say that for now, there are few signs of an overheating market. Demand remains strong, balanced by relatively low supply, and property investment is picking up. Furthermore, the gap between growth in the property market and the stock market indicates that speculative investors have to date avoided putting their money in physical assets.

"I actually don't expect any major correction in the physical market, even if you talk about major cities, or second-tier cities," said Ng. However, he cautions the same may not be true for next year.

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