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Reuters Edge

Price cuts, the last weapon for Chinese developers

BEIJING (Reuters) - After months of steely resistance, Chinese property developers have finally thrown in the towel and slashed prices as sales fall.

Whether the move succeeds in putting a floor under the market will help determine the fate of the economy over the coming year, especially because China needs to spur domestic demand to counter weakening exports as the global credit crunch intensifies.

“Property firms have to rely on themselves, sacrificing prices to boost transactions,” said Chen Sheng, deputy head of China Index Academy, which is affiliated with SouFun.com, a top real estate website.

Real estate accounts for 24 percent of China’s fixed-asset investment and is crucial not only for domestic steel makers but also for global producers of myriad construction inputs such as aluminum and copper.

“So the property sector matters -- a great deal,” said Jonathan Anderson, a UBS economist in Hong Kong.

Anderson expects property and construction activity to stabilize and rebound in the first half of next year.

But many developers, harried by declining sales and financing constraints, are less optimistic. China’s housing market, which had boomed for more than a decade, has been faltering since late 2007.

Prices in major cities such as Shenzhen have plunged by up to 40 percent, demolishing the myth that prices would never fall while China was urbanizing.

Average property price inflation in 70 large Chinese cities slowed to 5.3 percent in the year to August from 11.3 percent in the year to January.

Property sales fell 11 percent in the first seven months from a year earlier, adding to the squeeze on cash flow confronting most developers after Beijing intensified its credit tightening late last year.

So for some developers, selling unsold homes at a discount is their last hope to survive.

However, some analysts say price cuts will do little to boost sales as consumer sentiment has turned bearish. They worry China could be in for a protracted housing downturn.

“When market prices start to fall, there’ll be fewer buyers as people are not sure where the bottom is,” said Hou Liying, a professor at Shenzhen University.

More importantly, apartments are clearly unaffordable at current prices for most city dwellers, she added.

In Beijing, the average price of apartment in August is 13,584 yuan per square meter, higher than the average income of local residents for the first six months of 2008 -- 12,547 yuan, according to the National Bureau of Statistics.

WINTER APPROACHES

Vanke 000002.SZ, China's biggest listed developer, took the lead and slashed prices by up to 27 percent since late August in a handful of big cities, including Shenzhen, Shanghai, Hangzhou, Nanjing and Beijing.

Many peers, such as Shenzhen-based Gemdale Corp 600383.SS, have followed suit.

An index of the largest mainland developers quoted in Hong Kong .HSNP has tumbled 44 percent so far this year. Vanke is down almost 80 percent since peaking last November, while Gemdale has plunged more than 85 percent.

“Most developers expect the market to remain sluggish for another year or longer,” Deutsche Bank economist Jun Ma said in a note to clients after a trip around China this month.

In their heightened anxiety, property executives are clamoring for the government to relax its restrictions on bank lending to the sector.

"The market right now is in an autumn chill, with some small firms failing," Ren Zhiqiang, president of Beijing Huayuan Property Co 600743.SS, told a forum last week.

“If the government doesn’t do something to snap the financing constraints on developers, then a deep winter is coming.”

However, Beijing seems to be in no hurry to halt the correction in the real estate market and is unlikely to resort to the sort of rescue package that it rolled out last week for the sagging stock market.

Bank regulators reiterated in late August that banks must not lend to developers for land purchases, a sign taken by the market that the government would not loosen its grip any time soon.

Wu Xiaoling, a former deputy central bank governor, said last week that China should let the air out of its real estate market instead of trying to bolster property prices. If not, she said, China tomorrow risked sharing the fate of America today.

With an industry-wide profit margin of more than 30 percent, many of the developers have scope to cut prices, at least for now.

“That only means accepting a normal profit rather than a huge one,” said Matthew Kong, an analyst with Fitch Ratings in Beijing.

($=6.834 yuan)

Editing by Alan Wheatley and Anshuman Daga

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