BEIJING, Dec 18 (Reuters) A few months ago, Chinese property icon Zhang Xin worried how she would manage to carry on marketing expensive flats to yuppies.
The factory girl turned Wall Street banker called a meeting in her minimalist downtown offices in June to pore over stricter lending guidelines issued by the central bank.
China's Communist chiefs appeared intent on choking off one of a few industries the authorities fear could be overheating in the world's fastest-growing major economy.
One of the guidelines -- not yet in effect -- barring banks from lending to potential homeowners unless a building's main structure had been completed challenged a business model that relied on pre-sales to carry out massive building projects. "I remember sitting in this room. We all sat together thinking 'What are we going to do with this? We can just go home and sleep'," the co-founder of SOHO China Ltd said with a chuckle.
SOHO, which dropped plans for an IPO earlier this year because of poor market conditions, was set to pre-sell more than three billion yuan worth of property this year compared to 2.74 billion in 2002.
Then in August relief came for SOHO when China's cabinet issued a policy document declaring property a "pillar industry" that should develop in a sound way.
That document as good as banished her earlier fears and SOHO has also yet to see the restrictions actually implemented in its sector, she said.
SOHO still aspires to listings in New York and Hong Kong, but not any time soon.
"When you have a government coming out and saying we have overheating in the real estate industry, you're not going to get any investor putting money in," she said.
"Forget it," said the Cambridge graduate. "It's not a time to sell real estate to investors outside China now."
Several mainland Chinese property firms have raised capital in Hong Kong, including Beijing Capital Land <2868.HK> and China Resources Land <1109.HK>. In March, Shanghai Forte Land Co Ltd postponed a listing that could have raised up to $149 million.
But talk of overheating remains a headache.
PROPERTY BUBBLE?
Warnings of overinvestment in sectors such as property and autos have peppered official statements recently, prompting questions about how sustainable China's growth is.
Speculation has whirled that a property bubble, similar to one in the early 1990s, may be building.
Yet analysts participating in a panel discussion last month said there was little sign of froth even in Beijing and Shanghai, where more than 80 percent of people live in shabby apartment blocks thrown up by defunct or tottering state firms.
Red-hot demand is seen soaking up completed homes, which Morgan Stanley Dean Witter Asia estimates quadrupled to 220 million square metres at the end of last year from 1998.
The Shanghai government's real estate index shows that mass market housing prices rose 29 percent in the first 10 months of this year.
But the luxury end of the market, thought to be the hottest in any boom, is not so buoyant. Luxury residential home prices have risen only three to five percent to around 9,000 yuan ($1,087) per square metre over the past year, analysts said.
This also remains well below the $7,000 a square metre such luxury homes sell for in Hong Kong.
"I would hesitate to say that what we're seeing across the entire China property spectrum is a bubble," said Peter Churchouse, property analyst at Morgan Stanley Dean Witter Asia.
"We're not seeing massive increases in asset prices."
BANK LENDING FEARS
The real reason for fears of overheating lies with China's debt-laden banks, which had racked up more than two trillion yuan worth of outstanding loans to the property sector by the end of September, up from just 300 billion in 1998.
The profitable business of lending to growing numbers of moneyed homeowners has meant mortgage lending has jumped more than 100 percent on average each year over the period from 1998 to 2002, CLSA strategist Andy Rothman says.
Loans to developers and construction firms have jumped more than 25 percent each year while the broad money supply has grown more than 20 percent so far this year.
The stakes are high.
Though China has marched on with economic reforms since the late 1970s, it is only now starting to build a credit system able to separate good borrowers from the downright awful. The banks, already labouring under trillions of yuan worth of non-performing loans thanks to decades of politically driven lending to inefficient state firms, now risk being swamped by a sea of new defaults from the property sector.
That could trigger a banking collapse, analysts say, and shut down a job-creating economic machine seen as key to maintaining social stability amid wrenching reforms and mass layoffs.
Hence the central bank moves, which appear to have cooled money supply growth and lending.
"I welcome what we've been seeing recently by the authorities," said analyst Churchouse. "I think we have the potential to avert a major disaster".
