China started macroeconomic restructuring in 2008. Against an overall background where the consumer price index is persistently high and economic growth is slowing down, the real estate sector has also hit a relatively long period of restructuring. Chinese property developers' have been experiencing major slowdowns due to tight funding, the result of many would-be home buyers sitting on the sidelines with a wait and see approach, and thus causing a significant slowdown in sales.

Figure 1: Development Trend of China's Economy 2003-2008

China's homegrown property developers have for a long time financed themselves with bank loans for development, foreign investments, internal capital, down payments and advances from home buyers, and earnings from mortgages and land transfer. But in 2008, during the first quarter, although self-raised funds and bank loans were still increasing at a fairly quick speed, the supply of other financial sources was slowing. And in the second quarter, even bank loans that were previously available started shrinking sharply, only increasing 0.5% year-on-year, while the previous rate of increase was 30%-40%. Down payments and advances increased by 6.6% and other funds 1.3%??were all much lower than before. That is to say, all other financial supplies, except self-raised funds, have been shrinking drastically and has proven to be a major challenge as developers try to forecast what lies ahead for China's property sector.

The rate of increase for funding supply reached a peak in Q4 of 2007, and then it started dropping soon later in the same quarter and continued to drop in Q1 and Q2 of 2008. According to data from July and August 2008, the similar rate seems to become zero or even negative by the end of the third quarter.

Two reasons are responsible for the funding shortage in China's property sector. One is the reduction of available bank loans. The credit crunch and worries about the instability of the property sector have jointly created high barriers between property developers and bank loans. Moreover, since the property sector also started restructuring itself, banks have retreated from the sector to avoid the possible risks caused by the declining housing market. Another reason for the funding shortage is dropping sales, which is mainly the result of reduced demand, which in turn reduces funds that would otherwise be used as down payments and advances from home buyers and of course lack of available mortgages.