China's Heaven tarnished by slowing market

Chinese real estate developers — especially on the high end — are going to face challenging times for the rest of the year.

The looming problems include slow sales so far this year, more properties being readied for sale, and government restrictions on financing for new sales.

The Wall Street Journal’s “Heard on the Street” column says the developers are carrying large debts on their balance sheets at the same time the government is tightening money supply.

Bank loans to the real-estate sector fell to $6.5 billion in the second quarter from $25.8 billion in the first quarter, writes Tom Orlik.

Vanke, China’s largest developer, says it has even more inventory ready to hit the market during the next two months than its average so far in 2011, the Journal said.

The government could still reverse course and loosen lending as the rest of the world grapples with the possibility of recession, leading to a slowing overall economy in China.

It is likely the country’s own economic indicators — inflation was at 6.5% in July, the latest PMI was better that forecast though it did show contraction — would have to show improvement before Beijing’s mandarins ease up on money supply.

The Guggenheim China Real Estate ETF (TAO) illustrates the issues:

Oh, and the reference to Heaven? Shui On Land, like other developers, is planning to sell parts of its Tiandi projects — Tiandi is Chinese for “heaven and earth.”