Slowing growth in China has sent a chill through the global economy over the past few weeks, as Chinese central bankers have aimed to slow rapid growth through quantitative tightening.  According to an article on Bloomberg.com, those efforts to dampen growth may be too late for the Beijing commercial real estate market.  As we have noted over the past few months, lending activity in China was extremely robust over the past year and many believe this has provided a catalyst to pulling the global economy up by the boot straps last year.  The lending intensified in January as borrowers rushed to get funding before the spigot was turned off; 1.39 trillion yuan worth of loans were doled out last month, more than the preceding three months combined!  Quite a number of these loans went towards real estate and development projects as property values soared in Beijing.

The number of skyscraper’s built in the last year is simply amazing and is certainly reminiscent of a bubble mentality.  Jack Rodman of President of Global Distressed Solutions LLC, who has lived and worked in Beijing for the last eight years, estimates that nearly half of the office space in Beijing sits vacant.

He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($966 million) 74- story China World Tower 3. –Bloomberg.com 2/12/2010

If China can continue to grow at a high rate, many of these office buildings will surely find tenants and this will be much ado about nothing.  However, the sheer amount of leverage is frightening, as we are all well aware, it can amplify both good times and bad.  Earlier this month, the Chinese banking regulatory authority was quoted as estimating that a 10% pull back in property values could triple the ratio of delinquent loans.

As recent market action demonstrates, there are growing concerns that the Chinese growth story could have been too much, too fast.  While we understand that Mr. Rodman sells distressed debt from Beijing and may have a bias on the situation, we think risk averse investors should be aware of the mind-boggling growth going on over in China.  At least at this point, the demand for commercial property appears to be lagging supply, all the while property values have grown.  Is it a bubble?  Its too early to tell, as the Chinese economy is unlike almost anywhere else in the world, but distressing signs are starting to materialize.  Stay tuned.

Bloomberg: More Evidence of Chinese Real Estate Bubble