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UNCLAS SECTION 01 OF 03 SHANGHAI 000060 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
NSC FOR MEDEIROS, LOI, SHRIER 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
USDOC FOR ITA DAS KASOFF, MELCHER, SZYMANSKI, MAC/OCEA 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
MANILA FOR ADB USED 
PARIS FOR US/OECD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV CH AE
SUBJECT: DEFLATING ZHEJIANG'S PROPERTY BUBBLE 
 
REF: A) Shanghai 059  B) Shanghai 041  C) Shanghai 022 
 
¶1.  (SBU) Summary:  Financial sector contacts in East China's 
Zhejiang Province see signs of a property bubble forming, but 
some are awaiting more economic data before committing to rigid 
government controls over the real estate sector.  As a result, 
financial system regulators are somewhat divided in their 
approach to implementing the Central Government's property 
sector cooling measures.  They agree that part of the solution 
will be facilitating a greater supply of affordable housing. 
Regarding reported local investments in Dubai real estate, the 
regulators are confident Zhejiang is insulated from financial 
fallout.  End Summary. 
 
=========================================== 
Signs of a Property Bubble Appearing . . . 
=========================================== 
 
¶2.  (SBU) Financial regulators in Zhejiang told EconOff on 
January 21 (see also ref A) there are some signs of a bubble 
appearing in local property markets, but tended to downplay 
their current severity and extent.  Yang Xiaoping, 
director-general of the Zhejiang Office of the China Banking 
Regulatory Commission (CBRC), said that housing prices are up in 
Hangzhou and Wenzhou, but not much elsewhere in the province. 
(Note: The former is the provincial capital, and the latter is a 
freewheeling center for consumer-product exports on the 
province's southern coast.  End note.) 
 
¶3.  (SBU) Both Yang and Li Hong, deputy president of the 
Hangzhou sub-branch of the People's Bank of China (PBOC), agreed 
that, while housing prices in Hangzhou Municipality have risen 
sharply in the past year, there is strong enough demand from 
population inflows to support the market.  Li further pointed 
out Hangzhou, as the provincial capital, can attract wealthy 
households from elsewhere in the province looking for better 
education and services.  Yang said that, even though it may not 
be clear how big the real estate bubble is, the large down 
payments required by Chinese banks will protect them from risk 
-- such a large investment by homeowners will help prevent the 
situation in the United States, where homeowners with low or no 
down payments walked away from homes when the value fell below 
the mortgage balance.  Li also noted Zhejiang property 
developers are not under financial pressure as they were in 
winter 2008-09, since they had good revenues last year and 
therefore are not in a rush to sell properties at discounts. 
(See also ref B.) 
 
¶4.  (SBU) According to official statistics, Zhejiang has 
experienced some of the highest increases in housing prices in 
China.  For example, housing prices per square meter in Zhejiang 
Province rose over 24 percent year-over-year in 2009 -- among 
first- and second-tier markets, second only to Shanghai's rise 
of nearly 57 percent -- according to calculations based on data 
released by China's National Bureau of Statistics (NBS). 
Calculations using a separate NBS monthly index of property 
costs in 70 cities show three Zhejiang cities to have among the 
highest property price increases nationwide.  Although Guangdong 
Province's Shenzhen leads at 17.4 percentage points of 
cumulative month-over-month gains during 2009, Wenzhou is second 
with 14.9 percentage points, central Zhejiang's Jinhua is third 
with 11.9 percentage points, and Hangzhou is fourth with 10.8 
percentage points. 
 
============================================= == 
. . . But Views Vary on How Hard to Crack Down 
============================================= == 
 
SHANGHAI 00000060  002 OF 003 
 
 
 
¶5.  (SBU) Contacts showed some differences in how to implement 
Central Government measures to cool the real estate sector (see 
refs B and C).  CBRC's Yang seemed most ready to let some air 
out of any nascent bubble, saying that the recently raised down 
payment requirements on second home mortgages would be strictly 
enforced, as well as restrictions on converting land from 
agricultural use.  Tian Dazhang, deputy head of the Zhejiang 
Regional Headquarters of the Industrial and Commercial Branch of 
China (ICBC), confirmed the CBRC has been "very clear" on the 
requirement to raise down payments for second homes.  Tian also 
said ICBC crosschecks mortgage applicants across the province, 
making it less likely that one household can purchase homes in 
multiple Zhejiang cities under the preferences given to first 
home purchasers. 
 
¶6.  (SBU) On the other hand, PBOC's Li expressed more support 
for allowing the real estate sector to continue developing.  He 
suggested, for instance, that authorities would best wait until 
May to see the shape of the property market in 2010 before 
making further policy moves.  He said that, in general, the real 
estate sector should be left free of government interference, 
although he would support renewed government housing-purchase 
incentives if the economy were to slump again.  CBRC's Yang was 
strikingly opposed to the latter view, saying that if the 
economy turned down she would not only oppose reviving property 
stimulus measures, she would also require further increases in 
down payments to better protect the banks. 
 
=================================== 
Short Supply of Affordable Housing 
=================================== 
 
¶7.  (SBU) The biggest problem associated with a potential 
housing bubble in Zhejiang is pricing lower- and middle-income 
families out of the market, agreed our interlocutors.  Both the 
PBOC's Li and the CBRC's Yang suggested that this could be 
resolved -- bubble or not -- with a greater focus by authorities 
on supplying affordable housing.  The government could easily 
fix this by setting aside income from land sales for use in 
affordable housing construction, said Li.  Yang pointed out, 
though, that the government should also work to change 
expectations of some younger or poorer residents that they 
should be able to afford their own homes.  Perhaps, instead, the 
government could supply low-rent housing for newly graduated 
college students. 
 
============================================ 
Local Financial System Insulated from Dubai 
============================================ 
 
¶8.  (SBU) Despite widespread media reports that Wenzhou 
businesspersons have been wiped out by Dubai's financial crisis, 
Zhejiang banks have so far not been affected, said CBRC's Yang. 
(See also ref B.)  The Wenzhou branch of the CBRC visited the 
chairman of the Wenzhou Chamber in Dubai and was reassured that 
Zhejiang banks were insulated from the problems.  First, CBRC 
was told, real estate purchases in Dubai were funded by overseas 
operations, and were generally used for residences and 
businesses, not for speculation.  Second, the Chamber chairman 
said, the real estate financing system is different in Dubai, 
with lending done in tranches as the building is finished, 
meaning that a downturn in prices will be absorbed more easily. 
In addition, Chinese banks have not opened any branches in 
Dubai. 
 
 
SHANGHAI 00000060  003 OF 003 
 
 
¶9.  (SBU) ICBC's Tian agreed that, overall, the fallout from 
business problems in Wenzhou would not overwhelm Zhejiang banks. 
 Tian cited the Dubai financial crisis as well as Wenzhou 
businesspersons potential losses from forced sales of Shanxi 
coalmines to state-owned mine conglomerates.  Wenzhou 
entrepreneurs don't rely primarily on the banking system for 
financing, said Tian, and are also known for controlling their 
debt ratio well. 
 
¶10.  (SBU) CBRC's Yang said that, more generally, CBRC Zhejiang 
Office encourages local companies to "Go Out" (zou chuqu). 
Nonetheless, she said that banks have to be cautious, and cited 
the failure of United Commercial Bank in California.  This 
incident hit Minsheng Bank, said Yang.  (Note:  According to 
media reports, Minsheng -- China's only officially recognized 
private bank -- held a 9.9 percent share in United Commercial 
when it failed.  End note.)  Yang complained that it would not 
have been necessary for Minsheng to invest in United Commercial 
if the U.S. Federal Reserve would stop blocking Chinese banks 
from opening branches in the United States.  (Comment:  Yang 
seemed less than fully briefed on the specifics of the approval 
process for foreign bank branches in the United States.  End 
note.) 
 
======= 
Comment 
======= 
 
¶11.  (SBU) With some local property markets overheated in 
Zhejiang Province, financial regulators appear willing to take 
initial steps to cool the sector back down.  Their ability to 
guide the housing market to a more steady growth path, with 
housing for the full spectrum of demand from low-end to 
high-end, could have important implications for promoting 
domestic consumption.  That is, while real estate is rightly 
seen as a driver of domestic consumption, it probably also 
displaces consumption of other goods as it becomes more 
expensive relative to household income.  Even if air is let out 
of the bubble -- as appears likely at this point -- Zhejiang 
real estate developers have been left flush with cash from last 
year's sales and are unlikely to lower prices in markets that 
saw some of the highest housing cost growth last year. 
BEEDE