One of the most depressing sights travelling around China and other south-east Asian countries is that of partially-completed buildings from which the scaffolding has been removed, a sign that the developers have run out of money or that the prospects of renting the property have evaporated.

These concrete skeletons clutter whole streets of cities struggling to attract investment, and even blight the skyline of booming centres like Shanghai, where a new financial district of sky-scrapers has been thrown up in the Pudong district on the principle, "build it and they will come".

But they are not coming now as south-east Asia's financial crisis worsens, exposing the overbuilding in office blocks, shopping malls, apartments and hotels. The vacancy rate for office space in Pudong is 70 per cent. Inflated prices for commercial property across Asia, in Shanghai, Beijing, Hong Kong, Kuala Lumpur, Jakarta and Bangkok, are set to plummet, perhaps by 50 per cent in the next year, which means bankrupt developers and lending banks in big trouble.

It also means more attractive rates for foreign business executives and some markets, particularly in the Philippines and Malaysia will be strengthened by the cancellation of risky projects for lack of funds.

Where east Asia economies have raised interest rates to defend their currencies, a tactic successful only in Hong Kong which remains wedded to the US dollar, property-related debt has soared, making the situation precarious for lending institutions. All across the region the downturn in economic growth has lessened demand for office and business rentals. A slowdown in the regional construction boom will inevitably further depress stock prices and growth.

China's plans to exploit Hong Kong's stock market to fund the rebuilding of its out-dated state enterprises are threatened as foreign investors flee the market. With havoc on the Hong Kong exchange, Chinese companies are delaying plans to raise capital by listing in the former British colony.

In the face of the turmoil in capitalist Hong Kong, the communist Chinese government in Beijing is maintaining its cool. Foreign Ministry spokesman Mr Tang Guoqiang said yesterday that stability would soon return to the market.

Other voices strike a note of deep pessimism. The prospect of high interest rates over an extended period in Hong Kong will shatter the property market which is now paying the price for its "stratospheric property" prices, according to Mr Patrick Carpenter, a director at Hong Kongbased investment adviser, Marc Faber Ltd. "You can buy a can of coke in the supermarket here for about 5.50 Hong Kong dollars but you will pay between 35-50 for it in a restaurant," he said. "That's not because the restaurant is making great profits. It is entirely because they are paying all this money to the landlord." It could be the beginning of Hong Kong's long-term decline as a major trading centre on the Chinese coast, he told Reuters.

The prospect of a property sector crisis was underlined by a negative report yesterday from Moody's Investors Service on Hong Kong's banks. Moody's said it had changed its outlook for rated banks in Hong Kong from stable to negative, and placed the "B" financial strength ratings of Hong Kong and Shanghai Banking Corp and Hang Seng Bank Ltd on review for possible downgrade because of the prospect of unpaid debts due to higher interest rates.

Hong Kong stocks plummeted after the Moody's report, ending the day down 3.74 per cent.

Hong Kong real estate agents reported a 10 per cent fall in property prices this week. Mortgage loan demand will slow for the rest of the year, the Hong Kong Monetary Authority said yesterday again because of the rise in interest rates.

Some analysts in the territory, where the market was so hot earlier this year that buyers paid to enter a lottery for the right to buy city-built property, forecast that prices would drop by as much as 40 per cent. However, Mr Charles Cheng at Colliers Jardine said it was too early to tell the effect on property prices as "everyone is just waiting to see the impact of high interest rates and currency instability".

Another property analyst said: "We'll go through a cooling-off period but things have been too hot anyway."

An over-priced Hong Kong would benefit its rival, Shanghai, as property prices in Pudong are only a quarter of those in Hong Kong and will drop further. But China is still growing steadily and investment in its infrastructure companies is assured because of good fundamentals such as net asset value based on cash flow.

As small investors lost their life savings on the Hong Kong stock exchange yesterday, several Hong Kong property tycoons added over 200 million US dollars each to their personal wealth as they announced investments in electricity generation and toll roads in China. In the midst of the selling frenzy, their company share prices rocketed.