“May you live in interesting times” is the kind of mordant Chinese saying that could well describe the present seismic state of the country’s property market.

China’s economy has rocketed ahead in recent years, growing by 9.5 per cent a year for the past two decades, as the communist Government has abolished price controls, expanded private ownership and integrated the country with the world economy. That has encouraged an unprecedented migration from rural to urban areas. What was a largely agrarian economy is now an industrial behemoth, fuelled by a massive foreign investment boom. Privatisation has brought about a residential housing market, with the owner-occupation rate approaching 70 per cent in urban areas.

Shanghai, China’s biggest city, has transformed itself from a dreary backwater skirted by marshland 15 years ago to a city that can now challenge New York in terms of skyscrapers and Tokyo for its glitz and chutzpah.

Progress has not been smooth, however. A domestic credit boom, driven by lax lending conditions in state-owned banks, came to an abrupt end last year when the Government tightened credit conditions and upped property sales taxes to prevent the economy overheating. That has damped down prices all over China.

“The property market has overheated dramatically in the past 12 months, so the Government has now set out to control the market,” says Marcy Zhang, of Shanghai-based Crispin Property Consultants, who runs the firm with her husband, Sam Crispin, a Briton. “New developments have been severely contained and they made it more difficult to get a mortgage in China this year.”

Crispin, who has been a full-time resident of Shanghai and active in the property business there since 1994, says that, despite the risks, Shanghai and the rest of China still attract legions of investors from around the world.

More than $550 billion (£314.5 billion) was invested in China in 2004, making it the most popular country after Japan for foreign investors, according to Colliers International Property Services. That figure is twice as much as was invested in the previous year.

The Crispins have bought, renovated and sold a dozen properties, including old houses, and made an average return of 100 per cent on each property. But people invest in Shanghai not only because of the returns. To any visitor Shanghai’s attractions are immediately obvious. It is a frenetic city of 15 million people, a healthy mix of stylish expatriates and local people, world-class contemporary architecture and colonial old quarters boasting Art Deco, and traditional Chinese houses and flats; they are just some of the things that excite its fans.

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Investments in Shanghai start at about 16,000 yuan (£1,138) a square metre on the outskirts of the city, but you can expect to pay more than 25,000 yuan a square metre for property in a good location in the high-rise centre of Pudong or the more funky, historical Puxi district.

A 100 sq m new apartment costs an average of 914,000 yuan (about £65,000), according to the Shanghai Real Estate Exchange. That’s a third of the price for a similar apartment in London, Tokyo, New York and Hong Kong, but rents can be just as high as those in big cities around the world. This is a fact not lost on Wei Nolan who, like many foreign buyers before her, likes to buy older properties to renovate and sell on. She is in the process of refurbishing a four-storey block of flats from the 1930s, which she is turning into two duplexes.

“They can be difficult to make nice, but it’s fun to do,” Wei says of her purchase in the heart of the fashionable French Concession area of Shanghai, for which she paid 6.7 million yuan. She expects to sell it for 10 million yuan.

“Renovation is difficult, because these places are often total wrecks when you get them . . . there were six families living here before. But mercifully labour and building costs are very cheap, as are fixtures, etc.”

While waiting for a buyer, she lets the top duplex for $3,500 (£2,000) a month.

Elsewhere in China prices have not risen as sharply as in Shanghai, and any crash, as a consequence, has been rather softer. Latching on to Beijing’s rising profile as it gears up for the 2008 Olympic Games, investment firms are targeting UK investors with buy-to-let schemes in the Chinese capital. So confident are some that China’s star will continue to rise that they are offering to guarantee rents. Key Universal , a British investment firm, is marketing apartments in Beijing starting at £118,000, with a guaranteed 5 per cent rental return for the first ten years.

But be warned, says the economist and stock consultant Mike Shedlock (globaleconomicanalysis.blogspot.com), “Shanghai prices will probably stabilise now before the next big wave down.China’s economic growth is simply unsustainable. The property bubble is bad everywhere in China, and if it busts I think there will be a rolling bust. This could lead to a currency crisis, as China has kept hold of its US cash reserves. And there is a lot of hot money in China loaned to buy property in China at rising prices. Buying property in China is like buying IT stocks in the dot-com days,” he says.

Interesting times, indeed.

Tax on rental income is at 5 per cent.

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