Soaring investments in the real estate sector in China have prompted experts to sound the alarm.

Andy Xie, Asia-Pacific chief economist for Morgan Stanley, recently reported that the world’s economy is currently in the largest real estate bubble ever, and that the situation is worst in China. Xie predicts that the real estate bubble in China will inevitably burst in the next few months, at most in a year, and the epicenter will be in Shanghai.

Xie’s warning is based on the 40-year-low interest rates that the U.S. has implemented since 2001. The policy has caused a huge amount of U.S. dollars to flow into Asia, especially China, and this has triggered soaring real estate prices.

Family savings are dispersed into the real estate sector and this has caused real estate prices to rise rapidly. Xie also pointed out that because China delayed action in raising interest rates to control the over-heated real estate market, the real estate bubble is now out of the Chinese government’s control.

The New York Times, has reported that two-thirds of the world’s real estate is in a bubble, and the situation is the most serious in China. The residential property vacancy rates in Shanghai and Beijing are at 17 percent and 25 percent respectively. With the rates well past the international alarm vacancy level of about 10 percent, China’s real estate bubble may be showing signs of bursting.

According to Zhongli Yin, an analyst at the Chinese Science Institute Society, the key to determining whether a bubble has been formed is to analyze the difference between investments and purchases. If the difference surpasses a certain limit, then the stability of a city’s real estate sector would be affected.

In Shanghai for example, the difference between investments and purchases is enormous and a serious bubble effect is apparent. According to statistics released by Shanghai’s Housing Department, at the end of 2003 the difference was at 16.6 percent. This has surpassed the alarm level by 60 percent. Yin said the real estate bubble in China is clearly more serious, especially in Shanghai.

Xie’s report also revealed that the booming real estate markets have caused a decline in personal savings, resulting in a dramatic decrease in fixed investments. Xie’s current outlook on the real estate sector in China is grim. In his opinion, with the continuous rise in real estate prices and the increase in interest rates by the U.S. Federal Reserve, the bursting of the real estate bubble in China is inevitable.