China risks bubble from property stimulus

Source : Business Times – 24 Nov 2009

China should immediately halt some of its real estate stimulus policies, or risk inflating a bubble that in its bursting would wreak financial and even social trouble, a central bank newspaper said yesterday.

Debate is heating up in China about whether and how to wind down loose monetary policy and heavy spending, with officials voicing worries about asset price rises but also fearful that the broader economic recovery remains fragile.

An opinion piece in the Financial News, a newspaper published by the central bank, said that rampant speculation in the country’s property market was akin to a time bomb that could threaten future growth.

‘If China does not exit its stimulus policy . . . property prices and the market may go out of control,’ it says.

China’s housing prices have been rising since March, propelled by a slew of government measures from lower downpayments and mortgage rates to tax cuts.

Rising prices have encouraged developers to break ground on new projects, with real estate investment up an annual 18.9 per cent in the first 10 months of the year, compared with a mere 1.0 per cent rise in the first two months.

While the government has welcomed this surge in building activity, which is an important pillar of the economy, some officials now worry that property development is outstripping end-user demand in some locales and that prices are not affordable for ordinary citizens.

The article noted that expectations of a wind-down in stimulus policies were, in part, driving current transaction levels. November, traditionally a slack month, had been busy as people front-loaded purchases before a value-added tax exemption expired at end of the year, it said.

Separately, a senior government researcher said that China had to place the prevention of asset bubbles at the centre of any exit strategy that it devises for its broader stimulus policies.

He Fan, an economist at the Chinese Academy of Social Sciences, a top think tank in Beijing, said that if the central bank raised interest rates too early, it might only serve to suck in speculative capital from abroad and drive asset prices still higher.

But if Beijing moves too slowly to absorb the vast liquidity sloshing around the economy, asset markets will turn frothy on domestic momentum alone, in turn drawing in hot money from abroad, he said in a research note.

Targeting the exit strategy at problem spots will be the way to handle this dilemma, by, for example, suppressing property price rises or slowing the pace of loan growth, he said.

But China should not tighten its fiscal policy, according to Chen Dongqi, deputy head of the macro economic research institute under the National Development and Reform Commission, China’s powerful economic planner.