China is facing an unprecedented crisis of sorts after the realty prices started falling down. Shenzhen-based Chuanghui, which had been one of the largest realtors in the country, has shut down more than half of its 1,800 branches. Another Shenzhen-based agency, Zhongtian, closed most of its branches with reports of their Chief Executive absconding. The investors panic about some of the realty businesses would declare bankruptcy, has resulted in the share prices of the leading real estate companies to plummet by more than 50% in a short period.
The government’s stringent measures to contain credit growth and plans to introduce a tough new policy to reduce developers’ holdings of unused land, and the US sub-prime crisis together have had a double whammy on the real estate market. According to BNP Paribas, both China Agile Property and Greentown China have seen the spreads on credit default swaps (which allow investors to buy insurance against default) more than double since October to more than 1,000 basis points this month, indicating a high level of investor uncertainty.
The worst affected among the cities are Shenzhen and Guangzhou which lies in the southern part of China. The proximity to Hong Kong propelled these two cities to witness artificial and speculative prices which now dropped dramatically with the market sentiments. Northern Chinese buyers’ attitude to make cash payment for their purchases have, so far insulated those areas from sudden fall in property prices to a certain extent. The average price of houses in 70 cities rose nearly 8 per cent last year, while the actual urban incomes accelerated by 12 per cent. The property developers are pinning hope on rapidly expanding middle class base which will in turn augment housing demand.