BEIJING • When a 59-year-old accountant in Shanghai wanted to invest for her looming retirement, she bought two cheap apartments - on the other side of the country.
"When friends told me about a chance to buy properties in Xi- shuangbanna, I thought 'Why not?'," said Ms Yuan Junxi, referring to the subtropical region in Yunnan province, bordering Laos and Myanmar. "No buying limits; cheap, easy mortgages; and maybe property prices will jump over there too."
Buyers such as Ms Yuan, a mother of one, who borrowed to help fund her purchases of 280,000 yuan (S$56,400) each in the city of Jinghong last month, are spreading the risk of bubbles to ever-smaller places in China's provinces, after a crackdown by the government took some of the froth out of the property market over the past 14 months.
The spreading demand for homes in smaller cities underscores the enormity of the task ahead for China's leaders: Rein in the market without tanking the economy. The risk that China could fail to keep that tricky balance is at the core of the long-term financial concerns for China that triggered a downgrade by Moody's on Wednesday.
Mr Zhao Yang, chief China economist at Nomura Holdings, said: "The current surge in sales in third- and fourth-tier cities is fuelled largely by expectations of a future price rally, not by asset yields, and that is exactly a sign of a bubble."
The "biggest risk" is a downturn in those cities triggering an abrupt national sales slump, Mr Zhao added.
Cooling measures have pulled down price gains in cities such as Beijing, where the restrictions are harshest, Shanghai and Shenzhen. But that is not the case in smaller places like Tangshan or Bengbu. Both had a 2.2 per cent month- on-month gain last month, the biggest increase since at least 2011.
In Xishuangbanna's Jinghong - too small to feature in some bureau releases - prices rose 26 per cent in the 12 months ended March, according to ynhouse.com property data.
Citigroup analyst Oscar Choi said that strength in property markets in lower-tier cities is partly offsetting a worsening in bigger cities.
China's leaders adopted a targeted strategy to cool buyer demand in specific hubs, instead of a one-size-fits-all approach. That meant urging stricter curbs in cities such as Beijing and Shenzhen, which had seen the biggest growth, while leaving local governments in smaller centres to take the steam out of markets as they saw fit.
The trick, as cooling measures spread, is to avoid weighing too heavily on the nation's economic expansion.
National home sales growth slowed last month to the weakest annual pace in more than two years.