China's property restrictions gamble

Eric Jackson
Editor at Global Trader magazine
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Post date: Wednesday, 14th December 2011

In a country where gambling is a national obsession and wagers are taken on anything from Swansea scoring the first goal against Manchester United (as if) in a Premiership match to the fastest snail in a race down a Shanghai backstreet, the government of China visibly shudders at the thought of wild punts.

Heaven forbid that they should see the country go from boom to bust like their more reckless counterparts in the West.

But like it or not, Beijing is currently involved in one of its most important gambles, and it just doesn’t know whether to stick or twist.

The game – something that has provoked knowing nods of sympathy and perhaps a little bit of schadenfreude in recession-hit countries – revolves around the property market. Same old same old, eh?

Unlike in the west, however, where the genesis of the crash was the bursting of the hyper-inflated housing bubble caused by hands-off government policy, leading to the subsequent banking collapse, China – concerned over inflation and unrealistic property price rises - has tried to regain a firm hand on the tiller of the real estate ship after coming close to striking the proverbial iceberg.

That has meant tough government restrictions, such as bigger down-payments, higher mortgage rates and stringent bans against second-home ownership in some cities.

It’s a policy that had certainly put a stop to the escalating cost of homes and seen some falls, but some experts are worried that the measures could go too far and create a harmful plunge in prices and an economic slowdown.

On Tuesday Li Daokui, an advisor to China’s Central Bank, wrote in an article that the fiscal belt should be loosened to boost the amount of transactions and create a ‘soft landing’ for the property market.

“If tightening is too fast and too abrupt it will have an overwhelming impact on overall economic growth,” he said in Fortune Magazine. “If housing prices drop drastically it would place an enormous burden on the sentiment of many middle-income households.”

Mr Li urged the government to provide more support to first-time homebuyers and to loosen lending policies and purchase restrictions.

But no sooner had he played his hand, than the government, on the front page of the communist party’s official noticeboard, the People’s Daily newspaper, countered with a robust blocking move.

“The government is in a very difficult position,” said Tao Ran, an economics professor at Renmin University in Beijing. “If they relax macro­economic policy the bubble will get worse. But if they don’t relax policy then the bubble will pop and the economy will stall.”

The current restrictions should remain in place, the government insisted, to further reduce property prices. They see it as essential to keep housing affordable, although in the fashionable parts of Beijing and Shanghai, that would seem to be too late as property prices have risen to western levels.

Xinzha in Shanghai.

Bringing them down too much, while giving more people the chance to buy, could trigger a major property crash that brings other sectors down with it. Stick or twist?

Already housing purchase volumes have dropped as fast as prices, worrying many economists, who fear that one of the main drivers for growth – construction – could take a fatal hit.

Real estate construction accounted for around 13 per cent of GDP last year and a quarter of total investment, and observers predict the government will reverse many of its restrictions if prices fall more than 25 per cent over the next year.

Some, though, fear Beijing may wait too long to reverse course for fear of losing credibility.

“China’s property bubble is bursting,” says Andy Xie, an independent economist. From their current elevated levels, “prices may fall by as much as 25 per cent soon and by another similar amount in the following two to three years”.

The consequences of a crash would be dire for the wider Chinese economy and for the economies of many other countries that rely on China to fuel their own growth.

Jonathan Anderson of UBS says construction in China is “the single most important sector in the entire global economy, in terms of its impact on the rest of the world”.

“The growth model China has followed for the last few years, which has involved a whole lot of property construction, is running out of steam,” says Mark Williams of Capital Economics.

“People have not priced in the coming rebalancing of China away from commodity-intensive development and this has to be bad for economies like Australia, Brazil and Chile.”

This year the government unveiled a plan to build 36m subsidised housing units for low-income families in just three years, in the hope that this would make up for the slowdown in commercial housebuilding.

That’s a big hand to play, but whether it proves a winner or just skews the market even more remains to be seen.

And as even Premiership footballers such as Nicolas Anelka (who recently signed for Shanghai Shenhua) head off to China for a late pay day, the property ‘problem’ could mean that that trickle never becomes a flood.

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