Warning of defaults

The quick denial by the people's bank of China that it is involved in bailout talks with a small property developer in East China's Zhejiang province, gives fair warning against the widespread moral hazard within and beyond the overheated property sector that reckless lenders and borrowers can always count on the government to bail them out.

Such a blunt warning on defaults is badly needed.

Thanks to the huge contribution that the booming real estate sector has made to both local governments' revenues and the country's investment-led growth, especially during the 2008 global financial crisis, Chinese policymakers have largely stomached rocketing prices and excessive investment in the sector.

Yet, as real estate construction has soared to account for about one-sixth of GDP, a third of all investment in the country and about 40 percent of government revenues last year, some dire consequences of this credit-fuelled property boom are emerging.

That Zhejiang Xingrun Real Estate, a small local property developer, was reportedly unable to repay almost $600 million in loans from 19 commercial banks, does not necessarily harbinger a trend of defaults by developers. But it lays bare the dangers that the poor national data on housing prices fail to identify.

The business-as-usual official data announced on Tuesday showed that new home prices in 70 major cities rose by an average of 11.1 percent year-on-year last month, slowing by 1.3 percentage points from January. That basically depicts a rosy picture of slower but still double-digit home price growth, indicating no need for worry.

However, what happened in the real market is different. Not only the deep price discounts some developers in Hangzhou are offering new buyers but also less-than-expected price rise for a property project in Beijing have sent shockwaves through the stock market.

Now, the country's central bank has responded swiftly to a possible default, which the radar of national statistics did not reflect.

Be it an isolated case or not, the central bank's blunt denial of its involvement in a bailout will help warn both lenders and borrowers of the imminent risks of a property bubble.

More important, by refusing to extend a guarantee on those reckless debts, the Chinese government can considerably strengthen the credibility of its commitment to deepen reforms.

The process of defaults will surely be painful. So a warning can never be too early to get all prepared for it.