RIOT SIGNALS CHINA'S PROPERTY FEARS

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Few Chinese companies have been more adept at targeting the aspirational middle class than Vanke, the country's biggest property developer. On the outskirts of Hangzhou, the company is putting the finishing touches to a gated community called “A Glamorous City”, aimed at young professionals in one of the hubs of China's private sector economy.

Yet the showroom at A Glamorous City is closed after a group of customers vandalised it at the weekend. At Vanke's office in central Hangzhou, two armed security guards in faux-army fatigues block the front entrance after another group of customers trashed the premises on Sunday, destroying furniture and overturning desks.

The demonstrators came in search of compensation. Having already paid for yet-to-be-completed Vanke apartments, they were irate that the company was now offering discounts of up to 25 per cent on similar properties.

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“There seemed to be so many of them and they looked like they wanted to tear up the place,” said one Vanke employee in Hangzhou yesterday.

The mini-riot could be just one of many flashpoints in Chinese cities featuring people with little confidence in the legal system. But it comes at a time of mounting evidence that the property market is faltering, Vanke's vandalised office could be an indicator of more problems to come.

The fate of the Chinese property market is being closely watched around the world. For a start, it could have a big impact on the Chinese economy. The export sector, one of China's growth engines, is already battling against higher costs and weaker markets. If a slump in the property market drags down domestic investment – another of the main engines – the economy might suffer a hard landing rather than the gradual slowdown the government is hoping to achieve.

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Moreover, given the huge scale of the Chinese property boom, which stretches across dozens of cities with more than 1m people, a weak market will have an impact on global demand for commodities such as steel, iron ore and copper.

According to Arthur Kroeber at the Beijing consultancy Dragonomics, there are already signs that Chinese demand for commodities is weakening. “The news on property will get worse for a number of months until it gets bad enough that the government jumps in to try and pump things up.”

Although data on the Chinese property market are patchy, there are several clear signs of a significant slowdown. The square footage of property sold, which increased by 25.7 per cent last year, dropped 10.8 per cent on an annualised basis in the first half of this year. Moreover, the growth rate in floor space under construction – which gives a clue about demand for metals – dropped by 3 percentage points in July.

Chinese developers have been feeling the pinch. Their shares have fallen by about 70 per cent since last autumn and as many as 30 companies have had to postpone plans to raise new equity capital. Vanke announced this week that its sales fell by 35 per cent in August compared with the same month last year, although analysts think Olympic television-watching might be one explanation; the company's sales for the year so far are up 5 per cent.

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However, for all the difficulties facing the Chinese market, the situation is a far cry from the meltdown in many developed countries.

The slowdown in China is largely the result of government design. The authorities have restricted new credit in part to stifle inflation but they have also introduced measures deliberately aimed at limiting property speculation and squeezing out small, poorly capitalised developers.

Chinese banks face a problem of fraudulent mortgage applications. However, given that mortgages for second houses require a 30 per cent upfront payment and a quarter of all house-buyers pay in cash, economists say the potential for a property-led financial crisis is much lower.

“This is not at all the same problem being faced in the US and Europe where there are deep financing problems and slack real demand,” says Andy Rothman, an economist at CLSA in Shanghai. “Once the government decides that the measures it adopted have had enough of an impact, they will be removed quite quickly.”

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Despite the recent weakness in the market – which saw house prices, analysts say, either static or a bit lower in August – the market is a long way from a slump. Prices of new houses are up 7 per cent over the past 12 months in the 70 biggest cities in the country.

And while there have been property bubbles in individual cities, there is little evidence of a national bubble because of rising incomes. Indeed, despite the recent boom in house prices, salary increases have made property more affordable, not less.

The market is also underpinned by an annual influx of about 10m migrants who stream into Chinese cities, some of whom eventually become homeowners.

Vanke's problems in Hangzhou might also indicate light at the end of the tunnel. The company's discount offers have received a huge response. For some analysts, this shows that strong demand is there if developers are prepared to reduce their often-fat profit margins.