A few years ago, a senior official visiting Beijing from overseas is understood to have asked his embassy staff about the number of unoccupied residential tower blocks he had seen in the capital. It is a familiar sight in most major cities in China and their suburbs, but that only makes it all the more puzzling. Despite the fact that the lights were not on, the apartments were not empty, he was assured. A staff member quipped, "People are storing their money there."
The story illustrates neatly how vast sections of Chinese property buyers look upon property investment - and gold for that matter - as a way to fight inflation. (Sound familiar?) In China, bank deposit rates are regulated and kept low, so many Chinese see property as a good alternative investment to shares. In addition, its state-owned enterprises do not pay dividends and often speculate in property investment as well. The pervasiveness of property speculation was brought home to me a few years ago when a young Chinese colleague, straight out of journalism school, said she owned an apartment in Beijing but had not had the money to put in even bathroom fixtures and a sink. She had bought it solely to ride the property boom.
As in some of India's metropolises - yields on high-end property in Gurgaon have dropped to one per cent - this blind faith in investing in property may be about to be tested to the hilt. Data released last Thursday showed China's real estate sales had dropped in renminbi terms by 7.8 per cent through the end of April, compared with the first four months of 2013.
The overbuilding has finally gotten too far ahead of actual demand. According to official statistics quoted by the well-regarded UBS economist Tao Wang, there was about 5.7 billion square meters of urban residential housing under construction at the end of 2013 - six times the amount completed in 2013 and five times the annual sales. The decline in sales volumes appears to be accelerating even as this huge inventory of new apartments continues to pile up. China Confidential, a Financial Times' research service, reports that the 42 cities it monitors recorded on average a 26 per cent decline in sales in the first 27 days of April; second-tier cities are the worst hit.
The curious anomaly is that China might likely weather a drop in prices more easily than a drop in sales volume. Unlike the United States, household leverage is low. "Transaction volume may collapse, but prices may be stickier than in other markets," Ms Wang observes. The bigger problem, she says, is that property investment accounts for almost a quarter of fixed investment. Construction value-added as a percentage of gross domestic product (GDP) is 13 per cent.
Jamil Anderlini, the Financial Times' bureau chief in Beijing, goes further in underlining the risks to the health of the Chinese economy from its doper's addiction to property and infrastructure investment. He observes that in 2011 and 2012 China produced more cement than the US did in the entire 20th century; Moody's Analytics estimates that the building, sale and outfitting of apartments accounted for 23 per cent of China's GDP last year. China's unregulated shadow banking sector has loaned large amounts to developers and relies on high-priced land as collateral, which highly indebted local governments are dependent on as well, Mr Anderlini points out.
The knock-on effects of a property slowdown are binary: a steady loss of air from the property bubble could be managed by China's economic czars, but a loss of confidence that creates eruptions across the economy might even lead to protests. In fact, Beijing's skittishness about the anniversary of the June 4 massacre of protesters in 1989 seems significantly heightened this year. It recently detained the human rights lawyer Pu Zhiqiang. A personal hero of mine, the gravelly voiced Mr Pu is a rock star among China's lawyers and his clients have included the artist Ai Weiwei. The warnings to other human rights activists have also started earlier than usual, well ahead of the anniversary. China's maritime conflicts with neighbours like Vietnam - which on Wednesday resulted in retaliatory attacks on Chinese factories in Vietnam and those perceived to be Chinese - might also increase if nationalism was viewed as a way of distracting a population from their economic woes if the bubble bursts.
Just in economic terms, the ripples of the Chinese property slowdown could be felt far and wide across the world. UBS estimates that a sharp property downturn could result in China's GDP growth rate dropping to five per cent in 2015. Large commodity exporters in Latin America would be hit hard. "In India's case, a sharp slowdown in China could actually be a blessing in disguise, as its terms of trade could improve with global commodity prices falling," Ms Wang notes. In the next breath, though, she points to the obvious downside - if faith in the China growth miracle cracks, there will be a "contagion effect" on all emerging markets. Indeed, as looks increasingly likely, if both China and India are growing at only five per cent next year, foreign institutional investors are almost certain to run for the exits. The ever more giddy forecasts for the Sensex in 2015 might need to factor that in.