An office building in Kunming is demolished to make way for a new business centre development.

Things are grim in Kunming, capital of China’s vast southern province of Yunnan. Not so very long ago, Kunming was a pleasant provincial university city with relatively fresh mountain air. But over the past decade it has suffered the same fate as hundreds of Chinese cities: it’s been bulldozed and built up into one of China’s vast megacities, with a population of 8 million or more. It’s now China’s designated hub for its extraction of the wealth of resources in mainland south-east Asia: oil and gas, minerals, precious stones and hydro-electricity.

Kunming’s suburbs are now dotted with endless high-rise estates, many unfinished. Average house prices in Kunming have fallen by about 30% this year. Kunming is just one, admittedly dire, example but the picture across the country is also bleak. From January to July, sales volume of houses in China was 3.6 trillion yuan —  an 8.2% decrease from the same period last year, according to fang.com (fang means house), a leading real estate industry information website in China.

Official statistics tell the same story. In July, house prices fell in 55 of China’s 70 biggest cities — a disturbing 20 more cities than the previous month. New housing “starts” fell for the five months until July before picking up slightly, but these figures are malleable. In the murky world of Chinese statistics, a “start” signifies that the paperwork has been done but the diggers have not necessarily been brought in. Tim Murray, an analyst at Beijing-based J Capital Research, adds that developers must begin work on projects within three years or hand the land back. So the apparent uptick — and it is only slight — in activity is not all that it seems.

“In general, house prices have gone past the limit of people’s affordability, all across the country,” Chen Song, finance manager of a real estate developer in Kunming, told Crikey. In a recent price-to-income ratio survey, Chinese cities now top the world. This is not a short-term problem.

“Many developers are facing financial shortages and those buyers that can afford houses have adopted a ‘wait and see’ sentiment — this has all contributed to the sluggishness of the real estate market,” Chen said. He says high prices are only half the story — Beijing’s new very determined anti-corruption drive has also put people off.

Even more critically, money available for developers is drying up. “The property industry has little financial support from banks,” Wang Guoqing, research chief at steel consultancy Langesteel.com, said. In July 2014, Chinese banks issued 385.2 billion yuan ($67 billion) in loans, the lowest in the past 55 months. She said: “Real estate industry is no longer on the preferential clients list of the banks. And they themselves do not have strong desire to invest more.”

“The party is learning the hard way that … there are laws of economic gravity that can be put off for a time, but not avoided.”

There has been plenty written about the price of iron ore in the past week as it careened downhill toward five-years lows, closing at US$87.10 per ton last night, down 7.7% for the month and more than 35% since the beginning of the year. Some analysts say it can fall as far as US$70. Most of the commentary has focused on the abundance of fresh supply as long-dated new mines and mine extensions approved by avaricious company boards in the heady days of the mining boom come online. But the supply side is only one part of this perfect storm. Kunming represents the other. The Chinese housing and infrastructure construction market, which represents between 50%-60% of all steel demand, is sagging and shows few signs of improvement.

This is Australia’s problem, not just that of the mining companies. Billions of dollars of Australians’ superannuation is tied up in Rio Tinto and BHP Billiton. And then there are lower tax receipts, jobs, confidence and so on — it goes down the economic food chain.

The construction sector in China has gone into reverse at breakneck speed, and the government is struggling to stop the decline. The Communist Party’s recent attempts at even more stimulus — taking off the one house buying limit in all but nine major cities as of last Friday and attempting to fast-track infrastructure projects — have stuttered, at best. Local governments that must buy into infrastructure projects are generally broke after the 2009-2010 credit binge.

“There are bubbles in real estate, but not to the extent of collapse,” Chen said, adding with some hope: “The government will not allow, nor can they stand, the market to collapse.” But the party is learning the hard way that there are limits to stimulus as debt levels climb and overproduction continues, and there are laws of economic gravity that can be put off for a time, but not avoided.

So far top-tier cities like Shanghai, Guangzhou and Shenzhen have been reasonably insulated, which is helping prop up the market, Murray says. But Centaline Group, a major property sales agency in China, says in the first half of 2014, some 32,964 houses were sold in Beijing,  a whopping 47% fewer than the same period of 2013.

The economic rescue that domestic Chinese demand was supposed to bring has not eventuated; why would it when asset prices are falling?

News just in yesterday showed that China’s official PMI (purchasing managers index), the bellwether of large and influential industrial firms, dropped to 51.1 in August from 51.7 in the prior month, lower than market expectation of 51.2. ANZ analysts said this suggests that China’s third-quarter growth momentum has decelerated faster than anticipated, corroborating the “extremely weak credit data in July and continued weakness in the property market”.

There’s no denying China is continuing to grow and off a much larger base each year, but there are now very real questions as to what that growth will look like in the next 10 years. Australians should be worried.