Property prominent for nation's policies

13:53, March 01, 2010      

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China seems to be caught in a dilemma - while soaring property prices have left millions of people out in the cold and fueled growing concern over an asset bubble, the property sector remains a key economic driver.

To some extent, China's economy has been "kidnapped" by the property industry. It is estimated that the country's property sales, including both pre-owned homes and new apartments, may have exceeded 6 trillion yuan last year, accounting for one fifth of gross domestic product (GDP) during the same period. Property investment may have reached 3.6 trillion yuan, or 19 percent of the country's fixed assets investment.

Gu Yunchang, vice-president of China Real Estate Research Association, said at a recent forum that whether in terms of stimulating investment and consumption, the real estate sector plays a decisive role in the economic recovery and boom.

Moreover, land sales are the biggest revenue contributor. According to statistics from the Ministry of Land and Resources, the government netted 1.6 trillion yuan from land sales last year, equal to 40 percent of the nation's two-year stimulus package and 4.7 percent of GDP last year. The sector's sales revenue climbed 63 percent from 2008.

Local governments were the largest beneficiary of this land sales boom, with Hangzhou, Shanghai and Beijing being the top three, according to China Real Estate Index.

This fact also makes the central government's policy to cool down the feverish property sector hard to implement at a local level as it is equal to killing their biggest money-spinner, an even greater problem in a country where GDP is still a leading indicator of the performance of local officials.

For Fan Gang,an economist and member of the monetary policy committee of the central bank, the assets bubble has been one of the most daunting challenges for China. Property prices in China's key cities climbed more than 50 percent last year, making 85 percent of people currently not owning a home unable to afford to buy an apartment, according to a survey by Chinese Academy of Social Sciences.

Therefore, said Fan, the property market needs more institutions and strategies, such as the introduction of a property tax to curb speculative buying.

Meanwhile, the risk of people overstretching themselves financially also rose along with soaring property prices. Wang Zhaoxing, vice-chairman of the China Banking Regulatory Commission, said borrowing to buy property accounts for about 20 percent of new lending in China. In 2009, Chinese banks loaned a record 9.59 trillion yuan. Although Wang said banks' non-performing loans remained at a stable level and even saw a dip at the end of the third quarter of 2009, concern is mounting over the growth of bad loans.

In its latest annual Asian banking outlook, Fitch Ratings said a "bubble risk" was the greatest challenge for Chinese banks, given their 32 percent loan growth in 2009 and probable further growth of 20 percent in 2010. Nevertheless, it notes that the limited transparency of Chinese banks and their tendency to reschedule loans means that any resulting bad debt problems will be slow to surface, and that the Chinese authorities should have the time and resources to deal with any banking sector problems that may emerge.

The solution to this dilemma, according to the central government, is to develop more pillar industries to decentralize the power of the real estate sector.

Premier Wen Jiabao said on February 4 that plans should be made to develop a number of emerging strategic industries as the mainstay of China's economy as soon as possible, and traditional industries should be upgraded with the latest technology to enhance their efficiency and competitiveness. Wen added the development of science, education and culture was key to the transformation of China's economic growth model and its sustainable development.

However, in the short term, a challenge will be how to ensure a soft landing in the property sector.

"The property bubble is building up, but an urgent concern is to curb a further growth of the bubble while avoiding a hard landing that will seriously hurt the economy," said Tang Min, deputy general secretary of the China Development Research Foundation.

According to Tang, there are three criteria to judge a soft landing: No more increase in the property price, or a price drop less than 20 percent; no large-scale distressed assets in banks' mortgage lending, and a certain scale of property investment.

Statistics from Centaline China show that home sales in major cities declined in January from a month earlier as buyers continued to show reluctance to enter the market because of uncertain policy risks.

Yuwa Hedrick-Wong, Asia-Pacific economic advisor for MasterCard Worldwide, said unlike the property crash in the US, China's high real estate prices are shored up by residents' high saving rates.

Source: China Daily
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