Reporting from Washington and Beijing — Amid growing fears of a real estate bubble, Chinese officials moved Friday to restrain bank lending and put a lid on incipient inflation, a surprise action that shook financial markets around the world on concern that the leading engine of the global economic recovery could be slowing.
China's action will require banks to set aside more reserves with the nation's central bank, instead of lending the money to businesses and consumers. It was the second such step in a little more than a month and is aimed at curbing excessive borrowing, which has stoked government worries that China's economic gains could be undone by an overheated real estate market.
In the United States, stocks initially fell sharply on the news because of concerns that any slowdown in China could damp the U.S. economy. By the end of trading, however, Wall Street had recovered to post a modest loss on the day.
Some analysts had expected Beijing policymakers to raise bank reserve requirements in the second quarter. The earlier move may have been spurred by reports of stronger-than-expected Chinese exports and robust lending in January.
"The message coming out of China in recent weeks has been quite clear: Policymakers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year's aggressive expansion of credit," Jing Ulrich, a J.P. Morgan analyst in Hong Kong, said in a research note.
China's surging economy can be seen in rising home prices, reminiscent of the U.S. housing bubble a few years ago. In Beijing, developers can barely keep pace with demand as the amount of residential floor space sold in 2009 skyrocketed 82% from the year before.
New developments mostly target the wealthy, because builders can reap higher profits, shutting out ordinary Chinese such as Cheng Jingjing.
Cheng, a sports-equipment salesman, had set his sights on buying an apartment in a new Beijing suburb before local roads even had street signs. It was beyond his budget, so he thought he'd return after saving more money or in the unlikely event that prices fell.
"I made a big mistake," he said. "I didn't know prices would more than double."
The average price of an apartment in the capital is 15 times a typical resident's annual household income. The U.S. ratio is about 3 1/2 , as the housing crash made homes more affordable especially in places such as California's Inland Empire.
Some fear that China is headed for a similar crash, which could have far-reaching effects.
"If the bubble bursts, it will be a huge blow to China's financial system," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences.
In Shanghai, home prices have swelled 87% from the previous peak in 2007.
China's central government last year drew up measures to cool the sector. But pulling back may be difficult. Up to half of local government revenue is estimated to come from land sales.
The real estate industry accounted for about 25% of China's gross domestic product in 2009, taking into account secondary sectors such as cement and steel.
Driving concern is the abundance of liquidity in China's economy. Last year, the nation's banks unleashed $1.4 trillion, compared with $720 billion in 2008.
Other factors, however, suggest that China won't suffer the same fate as Japan and the U.S. when their property markets crashed.
For one, the Chinese aren't exposed to the low-to-no-down-payment loans that were popular in the U.S. Down payments in China average 60% -- 40% more than the legal minimum for first homes. Many banks are forbidden to lend if a mortgage equals half or more of a customer's monthly income.
"The amount of buyer leverage is far, far lower than the U.S.," said Arthur Kroeber, managing director of Dragonomics, a Beijing economic research firm.
The amount of credit extended to the Chinese property sector from 2003 to 2009 was equal to 40% of China's GDP, according to Newport Beach investment firm Pimco. In the U.S., the figure was 80% of GDP from 2000 to 2007.
Some believe China's urbanization and rising standard of living will absorb the new apartments.
"Given China's potential growth, its real estate market has plenty of room for enlargement over the long term," Koyo Ozeki, head of Pimco's Asian credit research team, wrote in a recent report.
Many Chinese see property as a solution to the country's limited investment options. There is no bond market in China, and the stock exchanges are volatile. Buying an apartment is viewed as a safeguard against inflation.
Those lucky enough to own multiple apartments face no added cost because China imposes no property tax. As a result, apartment space estimated at hundreds of millions of square feet sits sold but empty.