Most Westerners probably haven’t heard of Zhejiang, much less know where to find it on a map. But it’s likely that the clothes that you wear, the toys your children play with and your partner’s sunglasses are all made in this province located on China’s southeast coast.
But the economic success that has attracted investors here risks turning sour. Dozens of businessmen unable to pay off loans have fled the area and are now missing. The Chinese media, meanwhile, is speculating over whether a situation similar to the subprime mortgage crisis in the United States might be emerging.
The most dynamic city in this province is the city of Wenzhou. And, although it’s far smaller than the capital – and about 1,500 kilometres away – property prices there are similar to Beijing. The reason is simple – many private business owners have invested large sums of money into property here, which has pushed up real estate prices.
Soaring property prices in China have certainly upset at least one friend of mine, who sold his property in Beijing to go and study overseas about five years ago, only to watch prices in the capital soar five-fold while he was away.
Following this experience, he has been pressuring his Zhejiang-based parents to enter the real estate game. They are entrepreneurs, and owned a motorcycle accessories firm that employed dozens of workers. But they are far from alone in being tempted to enter the property market rather than investing in expanding their own businesses.
Under my friend’s advice, they sold off their business and rented out their factory. According to them, rising property prices and rents in the area mean they earn more from renting the property out than they would have earned from the motorcycle business.
However, since last year, the government has started to tighten bank lending. Zhejiang’s small- and medium-sized businesses are finding it difficult to obtain bank loans. And, with tighter property loan regulations, many are adopting a wait and see attitude.
All this means that many of those who hoped to earn big money from real estate are starting to get nervous as they are unable to sell their properties. This in turn has prompted the emergence of underground banks and loan sharks. Unable to borrow from official channels, private business owners have to borrow money at sometimes outrageous interest rates.
Over the past month, local media has reported on dozens of people who have fled because they couldn’t meet their loan repayments, while two more committed suicide by jumping to their deaths. A list of those who have disappeared has been posted at Wenzhou airport and other public places.
My friend’s parents are lucky – they didn’t get involved with loan sharks. But they have also seen the rent from their factory space tumble. And they aren’t the only ones – Wenzhou and Zhejiang are far from the only places outside Shanghai and Beijing to be seeing this phenomenon.
Chinese officials are warning that this country could be facing its own version of the US subprime crisis. It’s easy to see why.
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Frank
There is a big difference.
In USA, every middle class people suffer.
In China, only the rich people suffer.
Anon
Care to explain Frank?
Frank
It will take a few millon words to explain.
Just go to China. See for yourself.
a_canadian_observer
@Frank: Why do you guys always have to compare (with the US)(look they are bad too, we should be OK)? inferior complex at its best :)
Frank
USA is #1.
We are #2.
Inferior for sure.
Cam
@Frankie – “we are #2″, hahahaha…..LMAO!!!!
Frank
You are right. Forget about #2.
We are inferior to USA for sure. There is a large margin to be filled.
nirvana
(US vs China achievements)
In terms of military spending, US is #1 and China #2.
In terms of total oil import, US is #1 and China is #2.
In terms of TOTAL GDP, US is #1 and China #2.
In terms of GDP/CAPITA (at Parity of Purchase Power), US is NOT #1 and China is 120th.
In terms of number of billionaires (in $), US is #1 and China #2.
In terms of inequality in household income, China has overtaken US (2011) and is only behind a few African countries (Lybia removed from this championship).
In terms of polluting this planet, I am not sure which of the two is first.
Grant
I already know I’m going to regret asking, but how exactly is it that the rich people are the only ones to suffer in China? I’m fairly sure that the rich aren’t the ones suffering when coal mines collapse. I somehow doubt the rich are the ones suffering when trains crash and I seriously doubt that the rich will be the ones suffering when investors realize that the land is barely worth a fraction of what they paid for it.
yang zi
I think Frank is talking about the specific cases in Wenzhou, where loan sharks can’t get their money back. loan sharks’ money are pooled from rich people. There are loan sharks because government doesn’t allow private banks and state banks don’t have enough money to lend to small companies because of high bank reserve requirement.
Frank
The topic is “China Facing Subprime Crisis?”
Not about China’s other problems.
My answer is:
China has many other problems. Subprime is not one of them.
John Chan
Frank is right, there is no subprime in China, only real estate bubble but no subprime crisis.
In USA the subprime makes people borrow beyond their means, borrowers simply do not means to honour the mortgage, even without real estate bubble. Real estate bubble burst just make borrowers no incentive pretending to hold on the mortgage, its cascade effects caused the global financial meltdown.
When HK real estate bubble burst, normal borrowers continued to pay mortgages despite negative asset value because they borrowed within their means, only the speculators went burst.
China is the same situation as HK, only speculators will go burst, it is a good thing for the market and economy, wipe out the bad elements in economy that hurt ordinary people.
Most of the westerners do not understand subprime, subprime to them is worse than black death in Europe, so the westerners and its lackeys use subprime to express their ill wishes of China.
Anybody wants to understand subprime, please read “All the Devils Are Here” by Joe Nocera and Bethany McLean.
Jaques
Nonsense comments about not having subprime problems in China!
Subprime was a form of lending to those borrowers who were not (under normal conditions) capable of making principal or even interest payments back to their creditors. China doesn’t have subprime mortgage problems, but it has a huge amount of lending to “subprime” borrowers who shouldn’t really be given access to credit (due to their low / non-existent prospects of repaying their debts).
These include Local governments and their various infrastructure projects (many of which claim repayment ability but in fact are guaranteed by future local government tax and land sales revenue), a lot of property lending (to developers, not end buyers!), lending to SOEs who wouldn’t even be solvent without the huge amount of government support and protection they receive, investment lending to any of the over 100 “international financial centres” being built across China, or the several hundred airports (nb Beijing Capital Airport terminal 3 is still not using only one of its two satelitte buildings) and general lending based on collateral whose valuation is absurd (eg bonded copper, semi-useless land with inflated valuations, future tax revenue – as though repaying gullible banks will be allowed to prevent the provision of social services).
Subprime means lending to unworthy borrowers. Subprime Mortgage lending means lending to unworthy mortgage borrowers. China definitely has a subprime problem, although it has Chinese Characteristics.
Frank
China does not have Subprime CRISIS.
The loan sharks are not considered lending agencies. If loan sharks are suffering, who cares? They are criminals.
In USA, all of the middle class suffers.
SCdad07
The middle class in US, once the pride of US economic success and strength, was destroyed by the RE bubble according to Rex Nutting’s article in Market Watch. US economy, in past recessions, bounced back strongly and RE construction and ownership expansion played major role. Recent survey on MBA (mortgage bankers) members points to 2020 recovery.
Middle income family in China average US$15,000 per year (laments one foreign CEO on what can he sell), hardly to be the major player in RE speculation, especially restrictions and demands on 2nd or 3rd property ownership (recent news on 60% down payment for a 2nd home).
Quite a bit on what I read was on SOE and provincial government officials took or borrow funds (banks or funds under their care) to speculate/invest in RE.
Should the bubble burst (although very unlikely in my opinion due to huge demand by foreigners), I agree that those ‘rich’ should suffer.
SCdad07
The underground ‘banking/loan sharks’ ballooned as an unintended consequence of over belt tightening to fight inflation and it is a failure of China’s leadership under premier Wen to address the financial needs of private and mid-level enterprise, imo.
The author points to the problem but has not disclosed the ’size’ of such crisis.
SCdad07
Article in CN.WSJ mentions Wenzhou, a city in Zhejiang, which city officials have requested 60 billion RMB loan from central bank to mitigate the situation.
yang zi
China didn’t raise interest rate early and high enough, in stead it reduced the money pool that a bank can lend. this strategy favors big state owned firms, not private small firms.
it is a mini crisis at best as of now. China should allow private banks, just limit their size, make them like US community banks.
a_canadian_observer
@SCdad07: “The author points to the problem but has not disclosed the ’size’ of such crisis.” Perhaps the author doesn’t have the info to “disclose”. You may have better luck asking John Chan and other CCP bloggers.
Grant
In all likelihood no one is quite sure how devastating a bubble burst would be. Just like in anything that gets more money than it’s worth you’ll see a lot of money disappear, but are we looking at something as mild as the U.S dotcom bubble or something as bad as Japan’s crash? Until it happens and analysts can put the pieces together all we can do is guess. It’s the same for the Communist party.
John Chan
Money does not disappear, it just moves from one place to another, but asset value can disappear, people mix asset value with momey.
John Chan
@ a_canadian_observer,
You better remember what Thumper said “If you can’t say something nice, don’t say nothing at all.”
Frank
The underground ‘banking/loan sharks’ are rich people who are trying to make more money illegally. The borrowers are also rich shop owners.
The poor and working class Chinese are just fine. Actually, young people will be happy. That is the intent of Chinese government.
No crisis at all.
John Chan
The underground ‘banking/load sharks’ are greedy people, from rich to poor. The majority borrowers are also greed people, from rich to poor.
Grant
That’s not the typical modus operandi of loan sharks. In fact they try to avoid irritating the rich because the rich are the ones with the lawyers and police contacts to make life miserable for loan sharks who cause them problems. I’m starting to have to question your assertions. On another note even if it was true that doesn’t change the fundamental problem of a poor system to get and pay loans.
Major Lowen Gil Marquez, Phil Army
International Customers knows what is the right products that sooth their satisfaction,They spearheading for quality products that will lead to lifetime or longtime guarantee, The Market with low quality products that base on deception will meet his own made Waterloo. . Investors invested their capital on the area of Real Property Market because they see it as a good marketing stratagem that they will not loose their capital that to compare in marketing offensive that has a low quality products. . that’s my own personal opinion..
SCdad07
@Major – I am quite lost on what you wanted to say. Taking on face value (market efficiency and invisible hand), the world or I have been taken by the latest financial crisis with US RE bubble and toxic assets pondered around the world.
You can enlighten me and the board with more frank talking. TIA.
Milo Jones
One can make a case that everyone – China bulls, China bears, and even (gasp) the men of the Politburo – knows a lot less than they think about China and running a complex system. Hayek suggested the term “catallaxy” instead of “economy” precisely to suggest a complex system with emergent properties.
For more on this question, see: http://silberzahnjones.com/2011/05/15/china%E2%80%99s-present-the-world%E2%80%99s-future-and-the-pretense-of-knowledge/
Mãi Yêu Em
Industrialization, urban development push the need of room for investment to maximum limit that lands can handle. Land is very limited resources, the price for usage is especially high in such crowded cities in China.
At the beginning of development stage of China economy, real estate transactions and construction services contributed the biggest amount to its GDP. This movement turned a lot of people from empty pocket third world citizens into civilized millionaires. Where and how the magic money come and go is a very easy question to answer. Mostly they came from Wall Street investors and turned into low quality products consumed by Earthlings.
hk
Democratic China is good for mainland Chinese people.
davida
as a proud but sensible chinese, i am deeply concerned about the soaring price of real estate of china in various cities and there is a great resemblance between sub-prime mortgage and now the impending crisis that is just bubbling underneath the boom in the construction and purchase of commercial building and investment properties.
it is absurd that increasing number of people are paying through their noses in an attempt to get a piece of action, what is more preposterous is that very few super-wealthy chinese can alctually afford a couple of appartments in downtown of first-tier cities, with remaining of majority taking loans or risking anything they have for the sheer ” faire tale”.
people have to ask themselves, are those properties really worth so much in relation to ordinary people’s real disposable income? or is it just a scam by which a few business tycoons in collusion with goverment pump unbelieviable amount money into the market and after having sliced off a big fat chunk of profits, then they exit, leaving millions stranded in the market?
to be honest, i dont think ccp is behind this, at least not majority of it, cause in the event of apocolypse, it will be the party and its legitimacy on the line, which would be too horrible to comprehend. but warning the predators and sharks at large are lurking in the darkness, anyone with common sense, please take precautions.
John Chan
The value of real estate is in people’s mind, there is no such thing called real or fair value. At the high of HK RE bubble, even an application form to buy a new unit can sell for tens of thousands of dollars (an application form does not guarantee anything).
A typical two income family in HK, one income goes to mortgage in normal time. Comparing with HK, China RE bubble might be in the early stage.
Luckily China has a communist government, they cares about people, so they tried to control the market. HK is a typical capitalist free market, it is up to the individual to figure out how to survive.
JUSTSAYNO
Unlike the uber rich of western powers, the wealthy in Asia keeps their money primarily in real estate and China is no exception. The logic is simple: stock market in Asia is far less transparent hence risky, while population boom and urbanization pretty much ensure real estate properties keep their values. Unfortunately this behavior is also responsible for creating masses of speculators, mostly the wealthy who have access to capital.
What doesn’t make sense in the article is the author mentioning that Chinese wanted to buy properties in order to rent. This makes little sense because return from renting is terrible compared to the investment itself. A million dollar USD condo in Shanghai for example only can rent for about 3k USD per month. People buy homes in China in order to flip a short time after, not to hope on renting.
The author also fails to mention the major reason behind the government tightening access to loans and coming up with laws such as restricting one property per household member in some cities: There are too many speculators who are causing real estate market to skyrocket. This results in social instability as home ownership is often one of the criteria for marriage. The slight deflation of the real estate market is thus exactly many Chinese is hoping for. The people who are getting screwed in this are mostly real estate speculators who have bought to properties in order to flip and not to live in.
The_Observer
Agreed. Also see a recent Bloomberg opinion piece talking about the Chinese economy and the property market there:
http://www.bloomberg.com/news/2011-10-11/china-s-track-record-boosts-confidence-this-is-no-bubble-daniel-j-arbess.html
nirvana
(of the rich and the poor in the *People* Republic of China)
THE RICH
========
(Hurun Rich List 2011)
-875,000 individuals, i.e. < 0.1 % of the population, held more than $1.5 million each. Of this, 55,000 individuals held more than $15 million each.
-152 individuals of the Hurun 1000 list hold official political offices, made up of primarily of 75 delegates to the National People's Congress, and 72 delegates to the CPC. The richer they are, the more political positions they have with 30% of the Hurun Top 50 holding official political offices, and five of the Hurun Top 10.
-At least 38 delegates of the National People's Congress had each more assets than the wealthiest US Congress member.
-In 2011 China’s number of $ billionaires (128) is only second to US (412).
THE POOR
========
In 2010, 650 millions Chinese lived with less than $2/day, of which 150 millions lived with less than 1$/day.
http://www.china-mike.com/facts-about-china/facts-rich-poor-inequality/
A Mackenzie
I don’t think anyone in the world wants to see china in their equivalent of a Sub-Prime crisis.
AMackenzie
OMVCO.com
John Chan
@A Mackenzie,
You must come from Mars, majority westerners and its lackey are praying the real estate bubble in China is going to burst, so that China will go under with it, subseuently the eye sore of China will disappear for good, and hence the westerners can return to their previous superior position and look down on China again.
The above sentiment is all over the internet from the people high up to down below, if you care to look.
Mẽm Yêu Ai
Ahh… To be rich is glorious!!
So much for the concept of communism and the class struggle. So many millions in China died for nothing. At the end, capitalism still strives in the heart of all men.
Frank
“To be rich is glorious” as long as you are a good Chinese.
Loan Sharks “Subprime Crisis” is an indication that those people did not die for nothing.