Drastic changes to follow in the Chinese property market

Many Chinese share prices have dropped by half their value since the 2007 peak. At the same time, many companies are closing branches around the country as others try to get out of the property market as quickly as possible. All indications lead towards a nationwide shake-up in the Chinese property market soon.

China is currently undergoing a market crunch similar to that which occurred in the United States over the past year. There are obvious characteristics that point to a mirror image of the US's troubling housing market with house prices in a major slump, and several developers seemingly on the verge of bankruptcy.

This is further distressing to property investors in China after experiencing the rapid economic boom so far. However, it appears as though both foreign and native property investors and developers in China are being brought down on two overpowering forces. With the Chinese government attempting to slow their country's economic growth, and the current worldwide credit difficulties, developers are having a hard time keeping up, especially in the face of rather effective measures put in place to specifically limit credit growth. In addition, a proposed tougher policy aiming to reduce the amount of unused land within developers' holdings is adding to the severity.

One of the more ominous signs have coming been from behaviour in the debt market. BNP Paribas reported recently that both Greentown China and China Agile Property have witnessed more than double the rate of increase among the spreads on credit default swaps. These instruments enable investors to purchase insurance against defaults. With the rate at more than 1,000 basis points this month alone, there appears to be a high level of uncertainty among investors.

Much like mortgage banks and real estate agencies in the U.S., some of the largest real estate agencies are closing a substantial number of nationwide branches. Chuanghui, a Shenzen-based real estate agency and one of the country's largest, has shut down approximately 1,800 locations – more than half of its branches. Zhang Min, one of the company's planning managers located in their headquarters says, "We are doing our best to get cash." He further stated, "We have closed many outlets and got the rental deposits back."

However, many are speculating that differences in buying habits and localized real estate markets will enable China's market to escape repeating the fate of the US. Some believe that real estate markets in China truly are localized and differentiate enough from one another as to not be affected on a nationwide scale.