China Power

Taking Out the Pin

Officials have launched a raft of measures to tackle the housing bubble. Is it enough?

I mentioned in a post last month the growing pressure on the Chinese government to act to prevent the economy overheating. Well, talk of a dangerous housing bubble has only grown since then after figures showed that urban property inflation climbed to 11.7 percent in the year to March, from 10.7 percent a month earlier.

The property market has been described officials as one of the biggest economic challenges facing the country. But officials also undoubtedly have an eye on the social implications of surging property prices—a lack of affordable housing for low income workers moving to the cities is bound to be cause for concern, while the red hot market is pricing much of the middle class out of the market.

The government has already unveiled measures over the past week to curb prices, which the China Daily described Monday as a ticking time bomb. Among these measures (which seem mostly aimed at deterring speculative buyers from taking out mortgages) is an increase in the minimum down payment for purchases of a second home to 50 percent from 40 percent, and the setting of a minimum floor for mortgage lending of 1.1 times the benchmark lending rate.

Along with these policy measures appears to have come a government publicity push. The dramatic China Daily time bomb reference being one example, and the comments carried in official financial newspaper the China Securities Journal suggesting that some short-term pain is necessary being another.

Reporting on the China Securities Journal article, Reuters says:

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‘Tough new measures announced in the past week have wiped out 240 billion yuan ($35 billion) in the market value of listed developers and the damage will spread to related industries, the newspaper said.

‘But this is a necessary price to pay to head off an “all-citizen house-buying boom,” the commentary said. Left unchecked, it would distort the economy by suppressing much-needed consumption as people put so much of their savings into property.’

And the short-term pain is far from over, with speculation growing about possible further curbs, including a property tax.

Andy Xie, a Shanghai-based economist, thinks the government will need to take more drastic action, including a big hike in interest rates. Writing in Caixin, Xie argued yesterday:

‘China should quickly raise interest rates by 2 percentage points; current rates are ridiculously low. When this is the case for too long, it leads to a property bubble, resource misallocation, and, eventually, a financial crisis.

‘China’s interest rates are probably five percentage points too low. Yuan appreciation expectations have provided money holders with a substitute for interest rates. Indeed, such expectations have driven up yuan demand so rapidly that the central bank has increased its foreign exchange reserves three times, to US$ 2.4 trillion, in the past five years. China’s asset prices have risen by about the same magnitude. Inflation has followed.’

A big quick rise like this seems unlikely, but the fact that the government is apparently nudging official media to talk of the threat of social unrest underscores the seriousness with which officials view the problem.