Harsh property measures to benefit Chinese economy in long-term

14:37, May 02, 2010      

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China's booming property market suddenly cooled down in April - in home sales at least - after a range of government measures aimed at curb rocketing house prices.

However, the long-anticipated cooling fueled concerns the measures will also derail growth in the world's third largest economy, already beset by export uncertainties.

Zuo Xiaolei, chief economist at China Galaxy Securities, said property bubbles may be the major risk for the economy this year.

"The government has to move before the bubble bursts and destroys the economy," she said.

In April, the Chinese government introduced a raft of tough measures, including more restrictive down-payment requirements, higher loan rates, a ban on lending for third home purchases and tighter scrutiny of developers' financing.

Zuo said the measures sent a clear signal about the government's determination to check runaway property prices, which surged a record 11.7 percent in March, prompting complaints and intensified concerns about asset bubbles.

Hit by the measures, property sales in major cities tumbled.

Data from the China Index Research Institute showed Hangzhou, capital of eastern Zhejiang Province, saw a 72.55 percent month-on-month plunge in the area of properties sold during the week ending April 25. Beijing witnessed a 45 percent fall while in Shanghai the drop was 38 percent.

The measures have help stabilize home prices, but whether the measures will deflate the bubble as hoped depends on implementation, she said.

Zhang Hanya, a senior researcher with the investment institution of the National Development and Reform Commission, echoed the view, saying local governments rolling out measures tailored to their situation is the key.

Real estate is important to the Chinese economy. As a pillar industry, it also affects 60 other sectors including cement, steel and home appliances. Some have likened the entwinement to "kidnapping."

Real estate accounts for 18 percent of China's fixed-asset investment, which in turn contributes about 57.9 percent of the nation's gross domestic product.

The close ties have prompted fears any tightening measures will hinder economic growth.

The country's stock market, in reaction to the recent measures, has plunged.

The benchmark Shanghai Composite Index fell for its six consecutive day Friday, led by property, banking and energy shares.

Analysts have attributed stocks' decline to concerns the government measures will slow economic growth and hurt domestic consumption.

But Zuo dismissed such concerns, saying "massive building of low-cost housing and small apartments, together with renovation of shanty houses, will create demand for materials like steel and cement."

She said China's economic growth is already fast enough.

"Excessive growth will only strengthen inflation expectations and add to the pressure on policy makers to keep inflation under control."

China's economy grew by a better-than-expected 11.9 percent year on year in the first quarter, with the consumer price index, the main gauge of inflation, up 2.7 percent year on year in February, slightly below the 3-percent ceiling set by the central government this year.

Tighter restriction on property market lending has helped the development of the property market and the health of bank assets, Zuo added.

But Zhang Hanya was not so optimistic, pointing out decreased sales of land and apartments are likely impairing local economies as local governments' revenues rely heavily on income from land transfers and taxes on property developers.

Excessive tightening measures will hold developers back from investing, which could in turn dampen the whole economy, he said.

"The government is pretty clear the fast rebound in the economy has been largely buoyed by the property sector," said Yuan Gangming, a research fellow with Beijing-based Tsinghua University.

That explains why the government has hesitated in taking concrete measures to curb the precipitous rise of housing prices, he said.

China must tackle the property bubble for the sake of economic health, even at the expenses of a economic slowdown, according to Yuan.

The new policies may squeeze some bubbles, which will be beneficial for the economy in the long run, Yuan said.

The government has targeted 8 percent economic growth this year while pledging to improve the quality of economic growth, Premier Wen Jiabao said in his government work report at the annual session of the National People's Congress in March.

Source: Xinhua


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