One-time factory worker Zhang Xin rode China's property boom to become a billionaire. But if the boom goes bust, the whole world will feel her pain, reports William Mellor.

From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China, billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create. Zhang's avant-garde buildings - some sleek as chopsticks, others stepped like rice terraces - became part of the hottest real estate market on Earth this year.

Zhang is well aware of the chorus of investors and economists who predict that China's property boom is about to go bust, taking the global economy down with it. But the doomsday scenarios don't intimidate the onetime penniless sweatshop worker who ascended to Wall Street by defying the odds. She hopes to prove sceptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai.

"I don't see any bubbles," she says. "The next few months will be a fantastic time to buy."

Zhang, 44, personifies the explosive rise of China, from the poverty of Mao Zedong's communist rule to the riches of state-controlled capitalism in the world's second-biggest economy. At age 30, armed with a master's degree from Cambridge University and connections from working at Goldman Sachs in New York and Hong Kong, Zhang founded Soho China with her husband, Pan Shiyi. The company became central Beijing's biggest developer about a decade later in 2005 - and a favorite among investors.

Soho China's shares jumped about 14 per cent on the Hong Kong stock exchange this year, compared with a 9 per cent fall in the Bloomberg Asia Pacific Real Estate Index. Zhang's ownership stake is worth about US$2.2 billion (NZ$3.1 billion), ranking her alongside Oprah Winfrey as one of the world's wealthiest self-made women.

But Zhang, who rode the wave of China's three-decade expansion, now faces a real estate market that's due for a crash, says Andy Xie, formerly Morgan Stanley's Asia-Pacific chief economist, who now works independently in Shanghai. Economists began predicting a real estate bubble in China last year after its government pumped US$585 billion of stimulus funds into the economy. State-controlled banks went on a record US$1.4 trillion lending spree in 2009.

That sent residential real estate prices soaring 68 per cent in the first quarter of this year compared with the same period last year, pushing mainland China past Hong Kong as the world's fastest-appreciating housing market.

Beijing's skyline has shot up along with prices, leaving it with many unoccupied see-through buildings. In the central business district, more than one-third of office space was vacant in the second quarter, according to Chicago-based property advisory firm Jones Lang LaSalle.

"This is a serious bubble," Xie says. "The alarm bells are ringing."

Kenneth Rogoff, a Harvard University professor and co-author of This Time Is Different, a book that examines financial crises during the past 800 years, already sees signs of turmoil in China's housing market. "Property prices are starting to collapse," he says.

If China's real estate takes a dive, so will its economy, analysts say. Property investment and related industries make up about 20 per cent of the country's gross domestic product. The economy, which expanded 10.3 per cent in the second quarter, may slow to 5 per cent in the third period if housing plummets, says Jim Walker, chief economist at Hong Kong-based Asianomics.

The slowdown would reverberate throughout Asia and beyond, especially to countries that supply iron ore and other commodities that have fuelled China's boom.

"Commodity suppliers such as Australia and Brazil will be hard hit," Walker says. "They are incredibly China dependent. It could result in the double-dip recession people are talking about."

China's economic rulers this year moved to engineer a soft landing. In April, China's cabinet, led by Premier Wen Jiabao, began imposing stringent restrictions on lending to curb speculation, particularly on luxury dwellings.

Officials raised down-payment requirements and interest rates on housing purchases, boosted the proportion of deposits that banks must hold in reserve and, in Beijing, banned families from buying more than one new home.

The measures cooled the economy after it grew at a sizzling 11.9 per cent pace in the first quarter. Housing prices, which jumped a record 12.8 per cent in April, eased to 11 per cent in June.

Zhang believes government managers will prevent a crash. But unlike most of her rich Chinese peers, who keep a low profile to stay on good terms with officials, she has been very public in her criticism of government policies.

"The market should be making the decision to buy or not to buy, not be told by the government," she says.

"The government is very sensitive to public opinion and that's why people like us have the responsibility to talk honestly about what is happening. That would hopefully help to get the truth to the decision makers."

The English-speaking Zhang, who regularly appears in Beijing's society magazines, brings a Western style to the way she does business. During the 2008 Summer Games in Beijing, Zhang and Pan entertained fellow billionaire Rupert Murdoch and his wife, China native Wendi Deng, at a celebrity party - attended by bankers, movie stars and the media - at a resort they built with the help of 12 architects next to the Great Wall of China.

Zhang's company headquarters in the Chaowai Soho building looks like a Silicon Valley tech firm. Casually dressed engineers, architects and salespeople bounce around ideas in a communal coffee bar decorated with a sculptured herd of life-size fibreglass pigs.

"Many Chinese companies are run like military camps with military discipline," Zhang says. "We do not run a company that way. It does not help the creative process."

Pan, 46, the slim, balding and bespectacled chairman of Soho China, says his wife's relaxed management style only goes so far. Zhang, the chief executive of Soho China, enforces its corporate culture with the determination of a Communist Party cadre, he jokes.

In hiring noted architects from around the world, Zhang has pushed the boundaries of design in Beijing. "She is a natural experimentalist, simultaneously setting and defying trends," Pan says.

Zhang and Pan develop buildings for Chinese much like themselves: entrepreneurs. Many of their rivals put up conventional offices, to be leased mainly to multinational tenants, or grandiose villas and luxury apartments with swimming pools for China's super-rich. The duo conveyed their more practical side with the name Soho, which in this case stands for "small office, home office".

The company has developed 2.3 million sq m of real estate - including about a fifth of Beijing's central business district. Its early projects were multiuse, designed for living, working or both.

Buyers of Zhang's high-end units, which can cost more than 60,000 yuan ($12,500) a square metre, include coal mine owners and exporters. In the second quarter, 92 per cent of Soho China's buildings were occupied, Zhang says. Profit surged last year more than eightfold to 3.3 billion yuan.

"They focus on sectors which hold long-term promise," says Mark Mobius, Singapore-based executive chairman of Templeton Asset Management, which is Soho China's largest institutional investor. "They have high sensitivity and a great sense of style."

Zhang is now expanding her empire again, dismissing the China bears. In June she paid 2.25 billion yuan for a 22,500sq m plot of vacant land on the Bund, Shanghai's stately colonial-era waterfront strip, where buildings resemble those of 19th-century Europe. Two weeks later in Beijing, she started marketing a futuristic 485,000sq m commercial, retail and entertainment complex that's shaped like interlinked cocoons. It will be designed by London-based Pritzker Prize-winning architect Zaha Hadid.

Many investors don't share Zhang's optimism about the housing market. On July 16 the Agricultural Bank of China debuted on the Hong Kong stock exchange. Agricultural Bank made 1 trillion yuan of mortgage and other loans last year, and its rate of nonperforming credits at the end of 2009 was 2.9 per cent - almost double that of China's three other largest state-run banks.

As housing prices fall, bad loans will surge and hurt the state-owned banks, says Michael Pettis, a professor of finance at Peking University. "I would stay clear of property developers and banks," says Marc Faber, who oversees US$300 million at his own firm and has managed money in Hong Kong for the past 37 years.

Zhang, who was born in 1965 as China was about to plunge into the chaos of the Cultural Revolution, is an unlikely billionaire. Her parents, who were both translators at Beijing's Bureau of Foreign Languages, separated during Mao's crackdown.

As part of the Communist Party's forced exodus of intellectuals to work in the countryside, Zhang and her mother ended up in a rural part of Henan province. In 1979 they found their way to Hong Kong and lived in a single room just big enough for two bunk beds. They shared a bathroom with other families.

For five years, from age 14, Zhang toiled in small factories making sleeves, collars, zippers and electrical parts.

She says conditions there were similar to those in mainland China today. At Taiwanese-owned Foxconn Technology Group, which makes Apple iPhones in Guangdong province, at least 10 workers committed suicide in recent months, according to China's official media.

"My life then was exactly the same as those factory workers," Zhang says. "It was mindless work. You basically moved from one factory to another for whoever paid you slightly more."

By age 19 she had saved enough to buy a plane ticket to London and support herself while she studied English at secretarial school.

"Quickly, after I landed in England, I found out ways to get scholarships," she says. "England turned out to be a very encouraging place for me."

She won a spot at the University of Sussex, where she earned her undergraduate degree in economics in 1991. Then she enrolled at Cambridge and graduated in 1992 with a master's in development economics.

Barings, a London-based investment bank, hired Zhang right out of Cambridge to work in Hong Kong analysing privatisation in China. Soon after starting the job, she switched to Goldman Sachs, serving as an analyst at the investment bank. It was a short stay. In 1994, she joined Travelers Group. Homesick, she returned to China a year later.

Zhang told the New Yorker magazine in 2005 that she had detested investment banking. "On Wall Street, all values seemed upside down," she said. "People spoke crassly, treated each other badly, looked down on the poor and adored the rich."

She said investment banking reminded her of her days working in the Hong Kong garment factories. "The difference is, in Hong Kong the competition turned people into shortsighted mice, whereas on Wall Street it turns them into wolves and tigers."

Zhang stepped back into China in 1995 as the economy was moving away from orthodox Marxism.

As early as 1978, China's leader, Deng Xiaoping, had begun to open markets, declaring: "To get rich is glorious."

Beijing, famous for its exquisite 600-year-old Forbidden City flanked by stolid Soviet-style architecture, was beginning to sprout modern buildings. A friend of Zhang's recommended that she contact Beijing Vantone Real Estate, where Pan served as a partner.

Like Zhang, Pan was self-made. His grandfather, a supporter of Mao's rival, Nationalist leader Chiang Kai-shek, had fought on the losing side in the civil war that ended in 1949. The family had been persecuted for it and forced to eke out a living as peasants in impoverished northwestern Gansu province.

After getting a college diploma and working in the petroleum ministry, Pan in 1989 headed south to the tropical island of Hainan, then a freewheeling frontier about to be reshaped as the Hawaii of China. There, Pan learned the real estate business before returning with his partners to seek opportunities in Beijing.

Within four days of meeting Zhang, Pan proposed. Soon after their marriage, he left Vantone and the newlyweds teamed up to form a company called Hongshi (red stone), later renamed Soho China. Zhang would use her experience in investment banking to attract foreign investors and architects; Pan had local knowledge and connections to negotiate with the government to acquire the land.

At the time the local government in Beijing was developing a 4sq km central business district, about 5km from Tiananmen Square. The couple correctly gambled that the government would soon allow citizens to get home loans, and that a class of entrepreneurs would emerge to buy their live-work units.

For their first project, Pan and Zhang planned to turn a malodorous old Chinese liquor factory into Soho New Town: 10 brightly coloured buildings accommodating 8000 residents and hundreds of small businesses.

"Neither of us was financially established," Zhang says. "But the good thing about having no experience is that you have no fear."

As construction was about to begin in 1997, the Asian financial crisis struck, sending currencies other than the nonconvertible yuan plunging. Investors outside of China who had promised to back the project suddenly couldn't or wouldn't come up with the funds.

Pan turned to local investors to save Soho New Town, and the development sold out even before completion in 2001. Rather than trying to sell or lease entire buildings, Zhang and Pan peddled units to individual purchasers, a practice they still use today to reduce the risk of whole buildings sitting vacant.

As China's global aspirations grew, so did Zhang's. By the turn of the century Beijing had been chosen to host the 2008 Olympics, accelerating the government's plans to develop the equivalent of three Manhattans in the central business district.

On the site of an old machine-tool factory, Zhang and Pan began in 2002 to put up Jianwai Soho, a 683,000sq m complex of 24 white, cubic buildings of varying heights designed by a Japanese architect, Riken Yamamoto. The project was so large that it took five years to complete and exposed a weakness in Soho China's business model, says Jack Rodman, president of Shanghai-based Global Distressed Solutions.

After selling the apartments, offices and shops in their developments, Pan and Zhang turned over control to independent management companies. At Jianwai Soho, disputes over management fees and quality of service broke out between owners and property managers - tensions that continue to flare today. Some of the buildings are now in need of repair.

Zhang says the management breakdowns hurt the reputation of Soho China, which is taking back control of all but one of its developments.

"Earlier, we said, 'This is not our problem; why should we manage them?"' she says. "Then we realised they have our names on the buildings."

In 2007 Zhang persuaded Pan to take the company public in Hong Kong. Their timing was exquisite. They raised US$1.9 billion - the biggest IPO by a property company in Hong Kong that year. Less than a month later, global markets began to tumble.

The IPO marked a change in Zhang's relationship with Wall Street. Only two years earlier she had publicly lambasted investment bankers as wolves. Today, she is more circumspect.

"I had better be careful these days," she says. "I am their client. I work with them very closely."

Today the Soho name appears on 14 developments in Beijing. A year ago, Zhang and Pan made their first move into Shanghai with their purchase of the Exchange, a 50-storey office building on Nanjing Road, Shanghai's main shopping street.

Now called the Exchange-Soho, the development is a prime example of the real estate bubble in China, economist Xie says.

Soho China paid 2.45 billion yuan for the building - the equivalent of 34,000 yuan per square metre. In the first quarter of 2010, Zhang says, she was selling office space in the building for almost double that.

"Chinese property prices are 100 per cent higher than can be justified," Xie says.

Zhang, who early this year feared a bubble, now says her own research reveals that the property market is regaining its sanity. "We know from our own experience the prices are staying flat," she says.

Stephen Roach, Asia chairman of Morgan Stanley, agrees. China's property bubble is confined to luxury properties in the main cities, which collectively account for just six per cent of the total market, he says. "It's a micro bubble, not a macro bubble."

Donald Straszheim, the Los Angeles-based head of China research at ISI Group, says the government needs to put together a long-term programme to increase the construction of low- and middle-income housing.

"If they don't, the massive number of people getting richer each year will continue to bid up house prices and frustrate Beijing," Straszheim says. "When the government takes the lid off lending, house prices are going to go back up again. That's a persistent boom-bust cycle."

Zhang says success in real estate has come down to guessing what the government will do next. In June she gave her prediction at a conference attended by almost 2000 foreign investors in Beijing.

"Everyone was so pessimistic, and I was saying that in the next six months or a year, prices will go up again," she says.

"My guess is that it is austerity now, but at some point it will become stimulus again."