China should learn lessons from the Dubai crisis and take concrete measures to prevent a similar crisis from happening in its speculation-ridden real estate sector, which could undermine the national economy.

The announcement by the Dubai government of the United Arab Emirates last week that it was seeking a rescheduling on debt owed by Dubai World, the emirate's flagship conglomerate, and its real estate subsidiary Nakheel, threw the global financial markets into panic. Worldwide, foreign exchange, gold and stock prices suffered a drastic drop upon the announcement of the news.

According to predictions by some analysts, the market is going to digest the negative impact engendered by Dubai World quickly. The underlying reason why a crisis of such relatively smaller magnitude caused such a panic across the world financial markets should be attributed to fragile investor confidence in the wake of the outbreak of the global financial tsunami. Severely battered by the unprecedented global financial crisis in decades, any financial ripples plunge investors into fear and force them to flee the market for capital security. Also, the quick and timely dissemination of information in a well-developed information society has contributed much to stoke up investors' fears over any negative news.

As the world's third-largest economy that has expanded overseas investment in recent years, China is greatly concerned over the negative effects the Dubai crisis might have on its economy. After the exposure of the Dubai crisis, quite a few Chinese financial bodies or conglomerates were quick to claim that they had no business dealings with Dubai World and thus are immune from the fallout. The problem is not what impact the Dubai crisis will have on the Chinese economy, but whether the crisis will prompt the Chinese government and its decision-making bodies to reevaluate bubbles in the country's real estate market and weigh the role the sector has played in the development of the national economy. Failure to do so is likely to brew a similar crisis in the country's speculative real estate industry.

During his recent inspection tour of Shanghai, the country's eastern economic hub that has experienced a booming real estate market in recent years, Premier Wen Jiabao pointed out that speculative housing demand should be strictly checked to promote its healthy development. This should be the biggest lesson for China from Dubai World.

Soon after last year's global financial tsunami, the Chinese government worked out a series of stimulus packages to rescue the reeling real estate sector. As a result of the country's excessively loose credit policy, the real estate sector soon regained speculative momentum. Should the government continue embracing its year-long preferential housing credit policy, investors will believe that property prices will keep rising even though they are already high. That will draw more speculative capital into the property industry and then push housing prices even higher.

The Dubai crisis testifies that swollen real estate bubbles are sure to explode some day no matter what efforts are made to stop them. When it comes to China, if the property sector is still regarded as a prerequisite of gross domestic product growth and land sales still remain the main source of local revenues, a Dubai-like crisis is unavoidable. The Dubai case should serve as a wake-up call for the real estate-preoccupied Chinese local governments to formulate effective measures desperately needed to avoid a similar crisis in the country.

Now that the central government has realized the severity of the surging bubbles in the country's real estate market, it should halt the preferential housing credit lending policies. For example, it should first take strict measures to check housing investment and speculation, and only extend preferential policies to buyers who will occupy the homes. Favorable lending policies for second-home buying, which have fueled speculative housing demand, should be abolished. Also, a set of strict examination procedures, such as on individual financial status and credit records, should be adopted to ensure applicants are suitable for home mortgage lending.

The author is a researcher with the Institute of Finance and Banking, affiliated to the Chinese Academy of Social Sciences.

(China Daily 12/03/2009 page8)