|Hainan fears real-estate bubbles -
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
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 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.
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.
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
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).
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
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."
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.
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
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
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.
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.