Is the China real estate bubble now popping?

I'm wondering how does this affect demand for gold and dollar-based assets by Chinese investors. Will a rush into precious metals sustain the gold bubble, or will the U.S. dollar appreciate against everything as China stumbles?

Anyway, here's the article: " The Great Property Bubble of China May Be Popping."

Complete with a scary looking graph...

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Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.

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A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending. China is a "housing-led economy," says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13% of gross domestic product in 2010, twice the share of the 1990s.

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Standard Chartered Bank estimates that China's so-called tier-two cities, such as Dalian and Tianjin, may have 20 months of housing inventory by year end, putting "substantial" pressure on prices. Standard Chartered forecasts price cuts of 10% to 20% "in many cities."

A number of analysts think official data, which have continued to show a slight rise in prices, understate the slowdown as the government can affect the numbers by pressing developers to withhold or add high-value properties to the market depending on what it wants the data to show.

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Chinese officials, facing widespread anger from ordinary citizens who can no longer afford to buy a home, have sought to slow the rise in housing prices. The unanswered question is whether the government can manage to reduce prices gradually in a way that won't undermine economic growth.

Since January 2010, the Chinese government has introduced a number of measures to stem speculation, including boosting down-payment requirements on mortgages for second homes to 60% from 40%, barring state-owned enterprises outside the real-estate sector from investing in property and lifting the amount of cash banks must hold in reserve 11 times—essentially reducing funds banks can lend.

"In some ways, [real-estate] prices are really crazy," said Guo Shuqing, chairman of China Construction Bank, in an interview last week. He says the cost of apartments in big cities is well beyond young couples' means.

Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens. Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China's capital would cost around $100,000—the equivalent of 32 years' disposable income for the average resident. By 2011, the average price had more than doubled to $250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

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As a caveat here, it's always extremely difficult to tell just how much power the Chinese governent has to implement capital controls. On the one hand, I suppose you could point to all the tightening measures put in place and argue that these are good measures that will keep real estate prices from spiraling out of control. On the other hand, historically there have often been instances of governments trying to tighten credit right as they are headed into the storm.

The Fed tightened credit going into the tech bubble, and credit was shrinking back in mid-2007, when names like Denninger, Shedlock, and Schiff were dominating the blogosphere. (Anyone remember the " Punch Bowl Caucus" from August 2007?)

Chinese policymakers have much more freedom to reflate the hell out of everything by fiat, however, so even if they can't prevent the bubble from popping, they do have much greater power and flexibility (than say, Japan in 1990 or the U.S. in 2008) when it comes to how they respond to it.

Even so, if construction really accounts for 13% of economic activity, it's really hard to see what the government can coerce it's citizens to keep doing. A massive currency devaluation would help keep many workers competitive for producing exports, but world demand isn't exactly what it used to be, and might get dragged down in tandem with the Chinese economy itself.

We'll see...