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China's 'visible hand' clutches rising prices in 2011

2011-12-27 10:33    Ecns.cn     Web Editor: Wang Fan
A real estate salesperson is dozing off at a sand table in Shenyang, Northeast China's Liaoning Province on December 27, 2011. (Photo: CFP)

A real estate salesperson is dozing off at a sand table in Shenyang, Northeast China's Liaoning Province on December 27, 2011. (Photo: CFP)

(Ecns.cn) – Two figures that have much to do with the Chinese people's quality of life – the consumer price index (CPI) and property prices – all showed signs of cooling this year after rampant increases, according to China Youth Daily.

Judging by the results, macro-economic measures by the government have played a major role in curbing inflation and taming property prices.

According to the latest data released by the National Bureau of Statistics (NBS), China's CPI eased to 4.2% in November, a further decline compared to 5.5% in October. Also in November, 49 out of 70 monitored cities reported falling prices of newly-built residential properties from a month earlier, while prices in another 16 cities remained unchanged.

These controls have been ensured by the visible hand rather than the invisible, as the government has been releasing a series of regulation policies on both the food and property markets.

To some extent, the year 2011 has not been market-driven in China, but has tended to be under the control of the government, said Huo Deming, professor at the China Center for Economic Research of Peking University, who also warned that excessive government intervention will create side effects for the country's economic development.

Administrative measures target property sector

Since 2003, housing prices have rocketed in China, with demand soaring from individuals with high net worth. Also since that year, the government began to take in real estate regulation policy as an important part of macro-economic control. However, to the public's disappointment, the rising prices were not effectively stabilized until the second half of 2011.

On Jan. 26, 2011, China promulgated eight new measures to curb home prices, including further tightening mortgages. The loan-to-value limit of second home mortgages was restricted to 40% or lower while interest rates must be at least 1.1 times the benchmark, while local governments were accordingly asked to effectively manage the land supply and increase construction of economically affordable housing.

Similar measures were also announced in 2010, but this time the central government asked local governments to strictly implement the rules, ordering some cities to set buying limits and stop people from buying second or third homes altogether.

This has been a powerful blow to the country's property market, as average home prices have declined by 0.19% in November compared with October.

Property prices fall: the more the better?

To the Chinese people, home prices have been a very contentious topic. Those who have bought at least one home never want the prices to drop, while others who cannot afford homes are always hoping the prices will fall.

In a September sales promotion, Longfor Properties led the "Occupy 3%" movement in Shanghai, which resulted in an unexpected protest staged by homeowners against price cuts that had caused them losses on their investments. They broke glass at the sales office and marched with banners as a phalanx of police watched over, demanding to speak with the developer to get refunds or cancel their contracts.

The falling prices are bringing about other unwanted side effects. With home purchasing limits to continue in China, many investors have opted to buy houses overseas. In countries such as the U.S. and Canada, local property prices have also gone up, and Chinese investors are said to have played a role that cannot be neglected.

As the property market cools, local governments will suffer a decrease in fiscal revenue, as it becomes more and more difficult to sell use rights to residential land. As a result, they will get fewer land-transfer fees than before, which has been a main source of income for many of them.

Moreover, the furniture industry will also be affected as home sales decline.

To Huo Deming, the real estate industry is like the locomotive of a train: once it slows down, the carriages linked behind it will also reduce their speed. Though economists admit that there is a property bubble in China, they also warn that it could be catastrophic when it bursts. If the industry crashes, the whole economy will suffer a fatal blow.

Any better options?

Between December 12 and 14, an economic blueprint was laid out at the annual three-day Central Economic Work Conference held in Beijing, which set the tone for China's economic policymaking for the next 12 months as making progress while maintaining stability.

At the conference, it was noted that regulation of the property market is still very important in 2012, and that the government will continue to take stringent measures to control home prices.

Chen Guoqiang, professor and head of the Real Estate Institute at Peking University, said currently there is no better choice for the government other than setting buying limits, but he admitted that every policy inevitably has both good effects and drawbacks. If there is any need for adjustment, the government will modify its policy properly, he said.

Huo Deming hopes that policymakers could be more forward looking when they ponder future macro-economic measures, and warns that government over-intervention may harm the self-adjusting ability of the country's property industry.