Mania on the Mainland

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The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilizing prices, and building more affordable housing. To discourage speculation, the State Council, China's cabinet, is extending, from two years to five, the period during which a tax is levied on the resale of apartments. Tighter rules on mortgages may follow. Beijing also plans to build apartments for 15 million poor families.

KEY TO GROWTH

The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate; in November, for example, retail sales of furniture and construction materials jumped more than 40%. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth.

The worst scenario is that the central authorities let the party go on too long, then suddenly ramp up interest rates to stop the inflationary spiral. Without cheap credit, developers won't be able to refinance their loans, consumers will no longer take out mortgages, local banks' property portfolios will sour, and industrial companies that relied on real estate for a chunk of profits will suffer. It's not encouraging that the Chinese have been ham-handed about stopping previous real estate frenzies. In the 1990s the government brutally ended a bubble in Shanghai and Beijing by cutting off credit to developers and hiking rates sharply. The measures worked, but property prices plunged and economic growth slowed.

Analysts are divided over the probabilities of such a crash, but even real estate executives are getting nervous. Wang Shi, chairman of top developer Vanke, has warned repeatedly in recent weeks about the risk of a bubble. In his most recent comments he expressed fear that the bubble might spread far beyond Beijing, Shanghai, and Shenzhen.

PROFIT VS. SOUL

One difficulty in handicapping the likelihood of a nasty pullback is the opacity of the data. As long as property prices stay high, the balance sheets of the developers look strong. And no one knows for sure how much of the more than $1.3 trillion in last year's bank loans funded real estate ventures. Analysts figure a substantial portion of that sum went into property, much of it indirectly. Banks often lend to state-owned companies for industrial purposes. But the state companies can then divert the funds to their own real estate businesses—or relend the money to an outside developer. Meanwhile, the big banks may be cutting back on their real estate risk by selling loans to smaller local banks and credit co-ops.

For now, the party continues. On Dec. 12, Beijing developer Soho China celebrated a record-breaking year with a gala at the China Central Place JW Marriott (MAR). Guests dined on crab and avocado timbale, white bean soup, and beef tenderloin with wild mushrooms (Soho would not comment for this story). After a dance performance, a panel debated "The Balance Between Profit and Soul." When a writer joked he could not afford an apartment—and was still waiting for Soho Chairman Pan Shiyi to give him one—the crowd of 600 well-heeled developers, entrepreneurs, and consultants laughed appreciatively. If the bubble bursts, few will be laughing.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.

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