Cablegate: Deflating Zhejiang's Property Bubble

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E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV CH AE
SUBJECT: DEFLATING ZHEJIANG'S PROPERTY BUBBLE

REF: A) Shanghai 059 B) Shanghai 041 C) Shanghai 022

1. (SBU) Summary: Financial sector contacts in East China's
Zhejiang Province see signs of a property bubble forming, but
some are awaiting more economic data before committing to rigid
government controls over the real estate sector. As a result,
financial system regulators are somewhat divided in their
approach to implementing the Central Government's property
sector cooling measures. They agree that part of the solution
will be facilitating a greater supply of affordable housing.
Regarding reported local investments in Dubai real estate, the
regulators are confident Zhejiang is insulated from financial
fallout. End Summary.

===========================================
Signs of a Property Bubble Appearing . . .
===========================================

2. (SBU) Financial regulators in Zhejiang told EconOff on
January 21 (see also ref A) there are some signs of a bubble
appearing in local property markets, but tended to downplay
their current severity and extent. Yang Xiaoping,
director-general of the Zhejiang Office of the China Banking
Regulatory Commission (CBRC), said that housing prices are up in
Hangzhou and Wenzhou, but not much elsewhere in the province.
(Note: The former is the provincial capital, and the latter is a
freewheeling center for consumer-product exports on the
province's southern coast. End note.)

3. (SBU) Both Yang and Li Hong, deputy president of the
Hangzhou sub-branch of the People's Bank of China (PBOC), agreed
that, while housing prices in Hangzhou Municipality have risen
sharply in the past year, there is strong enough demand from
population inflows to support the market. Li further pointed
out Hangzhou, as the provincial capital, can attract wealthy
households from elsewhere in the province looking for better
education and services. Yang said that, even though it may not
be clear how big the real estate bubble is, the large down
payments required by Chinese banks will protect them from risk
-- such a large investment by homeowners will help prevent the
situation in the United States, where homeowners with low or no
down payments walked away from homes when the value fell below
the mortgage balance. Li also noted Zhejiang property
developers are not under financial pressure as they were in
winter 2008-09, since they had good revenues last year and
therefore are not in a rush to sell properties at discounts.
(See also ref B.)

4. (SBU) According to official statistics, Zhejiang has
experienced some of the highest increases in housing prices in
China. For example, housing prices per square meter in Zhejiang
Province rose over 24 percent year-over-year in 2009 -- among
first- and second-tier markets, second only to Shanghai's rise
of nearly 57 percent -- according to calculations based on data
released by China's National Bureau of Statistics (NBS).
Calculations using a separate NBS monthly index of property
costs in 70 cities show three Zhejiang cities to have among the
highest property price increases nationwide. Although Guangdong
Province's Shenzhen leads at 17.4 percentage points of
cumulative month-over-month gains during 2009, Wenzhou is second
with 14.9 percentage points, central Zhejiang's Jinhua is third
with 11.9 percentage points, and Hangzhou is fourth with 10.8
percentage points.

============================================= ==
. . . But Views Vary on How Hard to Crack Down
============================================= ==

SHANGHAI 00000060 002 OF 003

5. (SBU) Contacts showed some differences in how to implement
Central Government measures to cool the real estate sector (see
refs B and C). CBRC's Yang seemed most ready to let some air
out of any nascent bubble, saying that the recently raised down
payment requirements on second home mortgages would be strictly
enforced, as well as restrictions on converting land from
agricultural use. Tian Dazhang, deputy head of the Zhejiang
Regional Headquarters of the Industrial and Commercial Branch of
China (ICBC), confirmed the CBRC has been "very clear" on the
requirement to raise down payments for second homes. Tian also
said ICBC crosschecks mortgage applicants across the province,
making it less likely that one household can purchase homes in
multiple Zhejiang cities under the preferences given to first
home purchasers.

6. (SBU) On the other hand, PBOC's Li expressed more support
for allowing the real estate sector to continue developing. He
suggested, for instance, that authorities would best wait until
May to see the shape of the property market in 2010 before
making further policy moves. He said that, in general, the real
estate sector should be left free of government interference,
although he would support renewed government housing-purchase
incentives if the economy were to slump again. CBRC's Yang was
strikingly opposed to the latter view, saying that if the
economy turned down she would not only oppose reviving property
stimulus measures, she would also require further increases in
down payments to better protect the banks.

===================================
Short Supply of Affordable Housing
===================================

7. (SBU) The biggest problem associated with a potential
housing bubble in Zhejiang is pricing lower- and middle-income
families out of the market, agreed our interlocutors. Both the
PBOC's Li and the CBRC's Yang suggested that this could be
resolved -- bubble or not -- with a greater focus by authorities
on supplying affordable housing. The government could easily
fix this by setting aside income from land sales for use in
affordable housing construction, said Li. Yang pointed out,
though, that the government should also work to change
expectations of some younger or poorer residents that they
should be able to afford their own homes. Perhaps, instead, the
government could supply low-rent housing for newly graduated
college students.

============================================
Local Financial System Insulated from Dubai
============================================

8. (SBU) Despite widespread media reports that Wenzhou
businesspersons have been wiped out by Dubai's financial crisis,
Zhejiang banks have so far not been affected, said CBRC's Yang.
(See also ref B.) The Wenzhou branch of the CBRC visited the
chairman of the Wenzhou Chamber in Dubai and was reassured that
Zhejiang banks were insulated from the problems. First, CBRC
was told, real estate purchases in Dubai were funded by overseas
operations, and were generally used for residences and
businesses, not for speculation. Second, the Chamber chairman
said, the real estate financing system is different in Dubai,
with lending done in tranches as the building is finished,
meaning that a downturn in prices will be absorbed more easily.
In addition, Chinese banks have not opened any branches in
Dubai.

SHANGHAI 00000060 003 OF 003

9. (SBU) ICBC's Tian agreed that, overall, the fallout from
business problems in Wenzhou would not overwhelm Zhejiang banks.
Tian cited the Dubai financial crisis as well as Wenzhou
businesspersons potential losses from forced sales of Shanxi
coalmines to state-owned mine conglomerates. Wenzhou
entrepreneurs don't rely primarily on the banking system for
financing, said Tian, and are also known for controlling their
debt ratio well.

10. (SBU) CBRC's Yang said that, more generally, CBRC Zhejiang
Office encourages local companies to "Go Out" (zou chuqu).
Nonetheless, she said that banks have to be cautious, and cited
the failure of United Commercial Bank in California. This
incident hit Minsheng Bank, said Yang. (Note: According to
media reports, Minsheng -- China's only officially recognized
private bank -- held a 9.9 percent share in United Commercial
when it failed. End note.) Yang complained that it would not
have been necessary for Minsheng to invest in United Commercial
if the U.S. Federal Reserve would stop blocking Chinese banks
from opening branches in the United States. (Comment: Yang
seemed less than fully briefed on the specifics of the approval
process for foreign bank branches in the United States. End
note.)

=======
Comment
=======

11. (SBU) With some local property markets overheated in
Zhejiang Province, financial regulators appear willing to take
initial steps to cool the sector back down. Their ability to
guide the housing market to a more steady growth path, with
housing for the full spectrum of demand from low-end to
high-end, could have important implications for promoting
domestic consumption. That is, while real estate is rightly
seen as a driver of domestic consumption, it probably also
displaces consumption of other goods as it becomes more
expensive relative to household income. Even if air is let out
of the bubble -- as appears likely at this point -- Zhejiang
real estate developers have been left flush with cash from last
year's sales and are unlikely to lower prices in markets that
saw some of the highest housing cost growth last year.
BEEDE

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