By John Richardson
A BIG reduction in real estate prices is now underway in China, creating the potential for more property/chemicals traders to go bust.
The China Daily reports that home prices in suburban areas of Beijing, Shanghai, Shenzhen and Guangzhou fell by 30-50 per cent in July-September of this year compared with the same period in 2010.
"This is part of deliberate government policy to bring property down to more affordable levels in the major cities. In the smaller, second-tier cities it's not such a big issue as homes remain very affordable," a sales and marketing executive with a global polyolefins producer told the blog.
"I think Beijing is quite prepared to let property prices eventually settle at 30-40% lower in the major cities and they won't be worried if a few speculators go out of business - in fact, the government will be pleased. It wants to work as much speculation out of the economy as possible."
The July-September price falls were the result of speculators flooding markets with real-estate sales in order to generate quick cash to deal with financing problems, he added.
Financing difficulties are the result of restrictions on credit designed to tackle inflation.
Some real estate speculators also dabble in commodities trading, including petrochemicals.
As property prices decline even further, this will improve petrochemicals market transparency as more of these traders go bust, believes the sales and marketing executives.
"Fewer traders means less uncertainty about inventory levels. Markets since 2008, when the stimulus package began, have become very muddled because of all the new entrants to trading with virtually free cash available for gambling," added the executive.
But more broadly, if we are now facing further steep falls in property prices in China's major cities this is going to mean:
*The financial system under threat from a rise in non-performing loans
*Less polymer and chemicals demand for construction as oversupply is worked out of the market
*Angry investors taking to the streets to protest against the end of the "Beijing put" - the belief we picked up in China a couple of years that the government would never let property prices fall.