Hainan fears real-estate bubbles - again
By Stephen Wong

SHANGHAI - Money has flooded into the tropical Chinese island province of Hainan for property speculation in the few weeks since the central government unveiled a plan to turn it into an international tourist resort.

More than 100 developers, including publicly listed China Vanke, Agile Property and Poly, are believed to be investing in properties along Hainan's coasts, stretching 595 kilometers between Haikou in the north and Sanya in the south.

The jump in investment and rising valuations are reminding local people of the island's property bubble in the early 1990s, which, after it burst, was followed by nearly two decades of economic stagnation. The present property craze may be much more intensive than last time because Chinese enterprises and individuals now have much more money in hand and are thus more venturous in their investments.

At least 500 billion yuan (US$73 billion) of new capital has poured into the property market in Hainan, where per capita gross domestic product (GDP) is below the national average, according to a conservative estimate by Chinese media in January.

The inflow considerably outdistances the island's 36 billion yuan in housing sales last year, though even that was up 73% from 2008, according to Shanghai Securities News. Total floor area of housing available for sale in Hainan cities at the end of last year was less than six million square meters, according to local housing authority statistics. Given an average price of 7,000 yuan per square meter (psm) at that time, the market was worth 42 billion yuan.

The huge inflow of funds is driving up housing prices. The average house price rose 30% in January alone to 10,000 yuan psm, according to Shanghai Securities News. The price on a new housing estate in Haikou, the provincial capital, rose by 5,000 yuan psm in a single day. In the resort city of Sanya, the cost of a luxury house hit a record of nearly 70,000 psm, catching up with prices in Beijing or Shanghai.

People in China are now joking that Hainan is quickly becoming "an island of property speculation" instead of "an island of international tourism".

Concerned that the craze for property speculation may jeopardize Beijing's plan for Hainan's development, the Communist Party's Central Commission for Disciplinary Inspection has sent a team to investigate whether government officials and state-owned enterprises are involved in any irregular activities.

The property mania in Hainan began after Beijing unveiled a plan on December 31 to develop the island into an "international tourism resort" by 2020. The pro-tourism proposals include extending visa-free entry to foreigners, allowing inbound tourists from Russia, South Korea and Germany to stay in China for 21 days, granting duty-free shopping, relaxing gambling regulations and drumming up unrevealed amounts of money to develop the island.

The attractions of the island are obvious - sub-tropical sunshine and beaches. Although most of the development incentives have yet to be put in place, deep-pocketed property-investors and individuals who saw the potential of this Beijing-favored island immediately joined a gold rush. Within five days of the sate council, or cabinet, announcing its approval of the plan, housing sales registered 17 billion yuan, almost on par with the total sales value in the whole of 2008.

Fearing a bubble, the Hainan authority in January suspended land sales and approval of new property projects. This only pushed property prices even higher. Building lots were sold out with their foundations barely laid, and in the teeming sales offices, loaded mainland investors did not bother to haggle over prices.

Local hotels are filled with house-hunters who grab a taxi to new projects as soon as they touch land. Some media say selling a house in Hainan is much easier than peddling vegetables, and that real estate ads already outnumber coconut trees.

Rich retirees from China's cold north have long bought apartments in warmer Hainan, yet property investment by outsiders on the present scale was only seen here two decades ago, when, driven by news that Hainan was to become a special economic zone, home prices quadrupled in the space of three years.

The bubble burst in the middle of 1993 following belt-tightening measures by the central government and developers abandoned numerous unfinished buildings. Bad bank loans involved in the projects amounted to 30 billion yuan, and the local government spent 10 years rebuilding or tearing down the incomplete buildings.

In 1996, construction of the 31-storey Taiwan and Asia International Aviation Plaza was shut down and the half-baked block became the highest incomplete skyscraper in Sanya. After a decade, it was auctioned by the government and renamed Hanging Peninsula (from the Chinese name qingtian bandao, or hanging in the middle of the sky, meaning it's very tall).

Under its new name, the building is being marketed as a luxury block, with prices starting at 22,000 yuan psm. Suites below the 20th floor are sold out and the rest are being held back until prices rice even further.

Hanging Peninsula's developer, Guangdong Lianhua International, may be proud of his foresight, but the government and economists have ample reasons to worry about the overheated housing market. Chi Fulin, head of the China (Hainan) Reform and Development Research Institute, said: "If the speculation remains unchecked, the new real estate bubble of Hainan will compromise or even spell doom for the international tourism island plan."

Hainan provincial party chief Wei Liucheng blamed the media for the runaway housing prices and said it "ridiculously interpreted the proposals".

In recent years, the Chinese government has frequently formulated preferential policies for different regions, such as Pudong New Area in Shanghai and Binhai in Taijin, to help in national economic development. So Hainan is not alone in being handpicked by the central government as a focus for development. However, no other place has seen such a housing price spike.

Local party chief Wei recently commented that Hainan should never again be mired in a real estate bubble. He also promised to step up low-income housing projects and establish macro-control of land supply and the housing market to ensure the healthy development of the local real estate industry. These measures seem so far to have had little effect.

Wei, in a China Central Television interview, said the 1993 bubble would not be repeated, given changed economic conditions in Hainan and China as a whole.

It's true that China now has more rich people than two decades ago, but even today an average Chinese would be hard-pressed to buy anywhere to stay in Hainan amid the skyrocketing prices. Should factors such as a change in the exchange rate or any domestic or international turbulence break out, the hot money could be withdrawn quickly and the housing market crash.

Academic Chi Fulin argues that without strengthened regulation of the real estate industry, the local housing market will remain problem-prone and a nosedive will almost certainly follow the price surge.

The speculation in Hainan is part of a near country-wide housing boom since the government introduced an economic stimulus late in 2008. Encouraged by loose credit brought about by the stimulus package, housing prices nearly doubled last year. The average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to the Bureau of Statistics of the Beijing Municipality.

Behind the property price surge in major cities is a rapid growing stratum of rich people with ballooning wealth and a growing fear of imminent inflation.

The central government, concerned about growing public resentment and financial risks, has set out a series of policies to curb housing prices, including a higher sales tax, increased housing supply and a stiffer down-payment by developers. Other steps include building affordable apartments for the poor, raising the down-payment rate for a second-house purchase to 40%, and raising the deposit reserve ratios for banks. The policies have reduced property transaction volumes but prices remain high.

The measures also failed to dent the confidence of real estate developers. They are scrambling for land now as vigorously as before and keep pushing housing prices high.

A recent central bank survey shows that property is Chinese citizens' first choice for increasing the value of their savings. With rising inflation likely to erode the slim returns that savers receive on their bank deposits, property speculation is unlikely to stop soon as a preferred option and the bubbles may continue. Yet the increasing vacancy rate of apartments in Chinese cities should raise the alarm for investors.

Will the Hainan real estate market crash? The government cannot drop its guard; however, as for reining in housing prices, because of the economy's dependence on the real estate industry, the government's hands are tied.

Stephen Wong is a freelance journalist from Shanghai.