Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, says a crash is looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.
"I took these pictures to try to impress upon these people the massive amount of oversupply," said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city's commercial space is vacant, more than was leased in Germany's five biggest office markets in 2009.
Beijing's office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don't include many buildings about to open, such as the city's tallest, the $970 million 74-story China World Tower 3.
Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country's property market is in a bubble.
"There's a monumental property bubble and fixed-asset investment bubble that China has under way right now," Chanos said in a Jan. 25 Bloomberg Television interview. "And deflating that gently will be difficult at best."
A glut of factories in China is "wreaking far-reaching damage on the global economy," stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.
Digesting the debt from a popped property bubble may slash bank lending and drag growth lower for years in an economy that Nomura Holdings Inc., Japan's biggest brokerage, says will provide more than a third of world growth in 2010.
The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can't be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing's Tsinghua University, ranked China's top university by the Times newspaper in London.
The Nikkei 225 Stock Average surged sixfold and commercial property prices in metropolitan Tokyo rose fourfold before the bubble burst in 1990. The Nikkei trades at about a quarter of its December 1989 peak.
"You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates," Chovanec said. "At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it's just a case of when you recognize the losses -- or don't."
Property prices in 70 cities climbed 9.5 percent from a year earlier, the most in 21 months.
Policy makers are starting to rein in the loans that helped fuel the property boom. Banks should "strictly" follow real estate lending policies, the China Banking Regulatory Commission said on its Web site on Jan. 27. It called for banks to "reasonably control" lending growth.
The People's Bank of China on Feb. 12 ordered banks to set aside more deposits as reserves for the second time in a month to help cool expansion in lending. The requirement will increase 50 basis points effective Thursday, the central bank said on its Web site. The level is 16 percent for big banks and 14 percent for smaller ones.
Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be "Dubai times 100 or 1,000." Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.
The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that's the world's tallest.
It's difficult to determine how exposed Chinese banks are to real estate debt because loans booked to some state-owned companies as industrial lending may have been used to invest in property, say Xie and Charlene Chu, who analyzes Chinese banks for London-based Fitch Ratings Ltd. in Beijing.
