China is predicted by some experts to become the largest economic player in the global economy within the next 10 years. Their dominance is already seen in the large number of products they produce each year to sell abroad to several countries, including the U.S. As a result of their growing economic base, the Chinese government is wary to slow their progress. Manufacturing and exports are not the only economic pistons driving the Chinese economy. There is another financial force are work – their real estate market.

That’s why the Chinese Government enacted aggressive stimulus measures a year ago to ensure that real estate bubbles in some of their largest cities don’t spread to other large metropolitan areas in China. Boasting almost a dozen major cities with populations of five million people or more, and three with populations greater than 10 million, the potential damage to the Chinese economy due to a depressed real estate market is staggering.

Chinese officials, wary of being drawn into the woes of the rest of the world economy, took measures to battle these possible real estate bubbles, which for the time being seem to be working. That’s not to say that there hasn’t been some price inflation in isolated cities, however. There is still a great deal of concern about the future of the Chinese real estate market during these tumultuous times. Speculation in the real estate market has been so helpful to the Chinese economy as a whole that it must be managed effectively to avoid possible disaster.

House prices have risen modestly, about 4 % in recent months. Some cities such as Shanghai have even seen increases closer to 7%, with the highest at almost 14% in the southern manufacturing district of Shenzhen. China is somewhat isolated from the types of problems that other countries have faced in the last year, though. The fundamental causes of the real estate collapse in the US and other countries are non-existent in China. Buyers in China may only borrow 70% of the price of a home and even less for second properties, eliminating the type of zero down payment ARM loans that sunk the US market and created the American real estate bubble. This, coupled with the growing need for housing in China, keep their real estate market healthy for most part.

The only worry for government officials now is that this boom market will lead to speculation that eventually creates more supply than demand. Surging prices for land in many Chinese cities also causes pressure for developers in the short term to make money without asking inordinately huge prices for their properties. Currently the market in China is doing much better than a year ago, due in large part to government regulation. A run of soaring property sales and rising prices during 2007 led the government to impose restrictions on real estate sales and lending. As a result, home prices peaked in 2008 and residential property sales were down 17% as developers running short on cash faced greater debts.

In response, a regulatory effort came in the form of a four-trillion Yuan ($585 billion) stimulus package launched back in November of 2008 with the aim of encouraging banks to lend more. The result was an increase in loans which brought with it a rise in the average house price. Some experts believe that a third of developers in China would have taken a serious hit if these stimulus measures weren’t taken. Because of the success of this regulatory intervention, the move was seen in an incredibly favorable light by many of China’s largest real estate developers, who are seeing larger revenue than they had predicted for 2009.

It’s uncertain whether the current concerns over possible real estate bubbles in China will warrant further government intervention in their real estate market. There is also some speculation over the long term effects of the 2008 stimulus on asset prices for the coming year. Large economic measures such as this may take on a life of their own and prove difficult to reverse if they lead to inflation in the real estate market throughout China further down the road.

written by REI Circle (www.reicircle.com)