About Turn Awaits China's Developers

By ANDREW PEAPLE There may be no bubble in China's property market -- yet. But property developer stocks are outpacing even the Shanghai market's precipitate rise this year. Not everyone is sharing the euphoria. Some policymakers are voicing concern about a market recovery that's been fueled by the sharp rise in China's bank lending this year. That should give investors still bullish about property stocks pause -- there's precedent for Beijing officials to deflate bubbles. For now, the party's still in full swing. Share prices of most leading property companies have at least doubled this year, against an 89% rise in A-shares. The optimism does reflect a better picture for the property market. Transactions in major cities have boomed, up 53% on year in the first half. Property prices rose on the month for the fourth consecutive month in June. It's a moot point how far this is rooted in fundamentals. The Ministry of Finance late last week said it believed much of the extra lending to Chinese companies this year has found its way into the stock and property markets. Figures are hard to come by, but Moody's analysts reckon up to a quarter of the new lending has been so channeled. New loans made in China in the first half of 2009 totaled around $1.1 trillion, triple the amount a year ago. Also last week the Chinese central bank said it would strengthen its supervision of the real estate sector. And the banking regulator has warned banks to enforce rules on mortgages for second homes more strictly. The lending taps already seem set to dry up, with ICBC the latest bank to signal a sharp slowing of loan growth in the second half of 2009. If further tightening is around the corner, that won't be good for property companies which are only now in the process of rebuilding balance sheets hit by the last property sector downturn. In contrast with more optimistic equity analysts, Moody's has a negative outlook for 10 of the 13 Chinese property developers it covers, many of which face heavy refinancing requirements in the coming year. For sure, some property companies have been raising new equity this year, though that's often gone into new land purchases. Without a true improvement in their cash positions, the property market's resurgence may soon prove to have been too short-lived for many developers. Write to Andrew Peaple at andrew.peaple@dowjones.com