"The overheating is a normal phenomenon of the market economy, but at this time, it could be as destructive as it was in the early 1990s,?said Luo Yihua, general manager of China Real Estate Index System at the Beijing Soufun Holding Ltd. Luo's company, Soufun.com, operates the largest property website in China.

China's real estate market debuted in the early 1990s. Just a few years later, the slumping market reduced property prices nationwide by more than 50 per cent in the mid 1990s. A large number of property developers and investors went bankrupt.

Since August this year, the debate on whether there is a bubble in China's real estate development has escalated.

Yang Shen, president of the China Real Estate Development Association, warned last week that the unoccupied rate of China's properties has reached 19 per cent, or 125 million square metres, surpassing the internationally normal level of 15 per cent.

But Ren Zhiqiang, chairman of Beijing Huayuan New Times Real Estate Development Co Ltd, said the international index should not be used to measure China's rapid developing real estate industry.

According to Ren, in nations experiencing real estate booms, high growth rates of investment and development in the real estate industry are often accompanied by a higher unoccupied rate.

China has a 1.3-billion population, and in the coming 10 to 20 years, more than 500 million farmers will become urban residents, creating huge demand for housing.

In the first 11 months of this year, a total of 719.6 million square metres of land were developed, a rise of 34.8 per cent over the same period of last year.

In that period, real estate investment in China rose by 29.7 per cent to 485.7 billion yuan (US$58.7 billion), among which, investment for commercial housing rose by 30.5 per cent to 340 billion yuan (US$41.1 billion).

The fact that people are alert to the rapid growth rate of the real estate industry means that market players are more rational than before, Luo told Business Weekly.

Luo said that today, most developers in China are private companies and their sensitiveness to investment safety helps avoid real estate bubbles.

In the early 1990s, most investors in China's real estate field were State-owned firms. These institutional investors were often irresponsible regarding investment safety.

Another sign indicating China could face a real estate bubble is real estate developers have borrowed a lot of money, experts said. Statistics from the China Real Estate Development Association shows that the per capita debt rate of China's real estate development enterprises has reached 72 per cent.

Experts said that if some real estate developers went bankrupt, banks would suffer great losses and correspondingly reduce their scale of mortgage loans. This may cause a severe slump in property demand, bringing the real estate market into recession.

Pan Shiyi, a real estate developer in Beijing, says that a high debt rate by developers will not cause a real estate market recession.

"Most bank loans in the real estate industry have been lent to individual housing buyers instead of developers, therefore the bad financial situation of some developers will not cause great losses to banks,?Pan said.

Bank statistics indicate that by the end of October, China's bank loans for real estate were nearly 950 billion yuan (US$114.7 billion), with 700 billion (US$84.5 billion) lent to individual housing buyers.

"If banks maintain strict inspections on the quality of loans lent to real estate developers, the real estate bubble will be an overstatement,?Pan said.

Wang Shi, chairman of the Shenzhen-based Vanke Group, a leading developer in China, said land transactions in some areas have been too large, and many local governments want to make profits by leasing out greater amounts land.

The government should control the amount of land available for development to avoid possible real estate bubbles, Wang said.

(Business Weekly December 17, 2002)