Trouble in China's Paradise

Until recently, real estate buyers in Sanya, on China’s Hainan Island, carted around suitcases of cash so they could pounce on vacation apartments when they went on the market. “We didn’t even have time for toilet breaks because there were just too many clients,” recalls Zhu Lei, a property agent for the Serenity Coast luxury residential and hotel complex in Sanya. No more. Sales in the second-biggest city on the South China Sea island are “bleak,” Zhu says.

A two-year lending binge and a government campaign to transform Hainan, a tropical island in the South China Sea, into an international tourist destination like Hawaii, fueled a 48 percent surge in Sanya’s home prices in 2010, according to government data, making it China’s best-performing property market. Then in 2011, President Hu Jintao’s government grew anxious about runaway housing speculation. To cool things off, Beijing authorities increased minimum down payments for home purchases and raised bank reserve requirements.