China Property Bust May Prove Temporary, BOJ, UBS Analysts Say

By Mayumi Otsuma

March 31 (Bloomberg) -- China’s stage of economic development means any property-market bust following the current boom may prove temporary, according to economists at the Bank of Japan and UBS AG.

China today shares characteristics of Japan’s real-estate boom of the 1970s, when the nation quickly recovered from a slump, according to a Bank of Japan research paper. The Chinese economy will be able to keep expanding even in the event of a property contraction, said UBS’s Beijing-based Wang Tao.

The view contrasts with that of Kenneth Rogoff, the Harvard University professor who said last month China may see growth plunge to as low as 2 percent in the aftermath of the collapse of a “debt-fuelled bubble” within 10 years. Premier Wen Jiabao is trying to rein in property speculation after prices rose the most in almost two years.

“People tend to compare China with Japan in the late 1980s but the two situations are very different,” Wang, the head of China economic research for UBS, said in an interview last week. “The biggest difference is of course that China is still at a low stage of development, so if there is a big correction it still has the potential to grow out of it.”

Economic growth of almost 10 percent, surging incomes and a rapid flow of people into cities spurred “real demand” for housing and boosted property prices in Japan in the 1970s, similar to China today, according to the paper co-written by four BOJ economists.

Parallels With Japan

The parallels also include a low ratio of debt used to buy homes, the Japan central bank officials said in the paper released yesterday. Wang also said the lack of a mortgage- securities market in China means property buyers aren’t borrowing as much as Americans did during the U.S. housing bubble.

Property prices in Japan rebounded “pretty quickly” after plunging in 1974 amid the global oil shock, because brisk economic growth fueled incomes, the officials said. In contrast, Japan’s asset-price collapse at the start of the 1990s drove the country into prolonged doldrums because urbanization was almost complete and growth slowed.

Japan’s experiences show “the depth of the property-market adjustment would differ depending on the stage of economic development,” the economists said. “Given its high potential growth and low leverage, China won’t likely suffer a severe property-market adjustment, like the one Japan went through in the 1990s.”

Development Stage

Growth in Japan averaged 9.3 percent in the decade through 1973, compared with 9.9 percent in China between 2000 and 2009, according to the paper. About 45 percent of Chinese currently live in urban areas, the same level as Japan in the early 1960s, it said. Per-capita gross domestic product in China, the world’s fastest-growing major economy, is about $3,500, similar to Japan’s $3,800 in 1973.

Wang also said the possibility of a “boom-bust is quite high” and “avoiding a property bubble in China will be very, very difficult.”

Rogoff, the former International Monetary Fund chief economist, said in an interview in Tokyo last month that land is “the best bet” for the cause of a China crisis. A collapse would cause a “very painful” period which would persist for about a year and a half, while falling short of a 1990s Japan-style lost decade, he said.

Local Authorities

Local governments in China are aggressively developing properties to boost revenues and are welcoming market rallies, the BOJ report said. The paper was written by Ichiro Muto, Tomoyuki Fukumoto, Miyuki Matsunaga and Satoko Ueyama, all economists at the bank’s international department.

Capital inflow from overseas is also providing short-term speculative money, the report said.

Bank lending in China also draws parallels with Japan in the 1970s. Loans by Chinese banks equal between 110 percent and 120 percent of nominal gross domestic product, the same level as Japan around 40 years ago, the researchers said. The ratio jumped to around 180 percent in the 1980s in Japan.

“During Japan’s bubble economic boom in the 1980s, real- estate prices rose without real demand for houses related to urbanization,” the BOJ paper said. “That makes a difference from the booms in Japan in the early 1970s and China today.”