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Tom Holland

Beijing's flagship economic policies this year are all aimed at making life more affordable for ordinary people.
To achieve that, senior officials have vowed to defeat rising inflation and bring consumer prices back under control.
On top of that, they have pledged a massive programme of home building, promising to invest trillions of yuan to build tens of millions of low-cost homes for families shut out of the housing market by soaring prices.
These are both worthy objectives. Unfortunately, they may not be compatible.
The surge in the mainland's inflation rate over the past 18 months has been driven largely by a massive government-ordered expansion in credit that saw outstanding bank loans rise from 97 per cent of gross domestic product in late 2008 to 121 per cent at the end of last year.
Now with price rises running well above the government's comfort zone, Beijing is anxious to tighten policy again and cut back on lending by the country's state-controlled banking system.
Just last Friday, the central bank raised the proportion of their deposits that large commercial banks are required to set aside as reserves to a record 20 per cent.
That's unlikely to be the end of the story. Analysts warn that further measures to curb bank lending, including strict loan quotas and interest rate rises, will be needed over the coming months if inflation is to be brought under control.
The problem, however, is that the tightening measures needed to quell inflation will make it a lot more difficult for local governments to press ahead with their investment plans, including Beijing's ambitious public housing programme.
As Monitor explained last week, when Beijing ordered the mainland's bankers to lend, they did so with enthusiasm. But in order to reduce their risk, they lent mostly to state-owned companies deemed too big to fail.
The companies themselves had little need for all that cash, and only limited ability to invest it in their core businesses at such short notice. So, in order to reduce their own risk, many invested their loan proceeds in property developments, where they felt reasonably confident of generating a decent return.
Flush with spare cash, they rushed out and bought land, and they weren't too bothered about how much they paid. According to one recent study, in late 2008, immediately before the lending binge began, state-owned and private companies were both paying about 3,000 yuan (HK$3,560) a square metre for residential land. Six months later, private companies were paying much the same, but state enterprises were splashing out more than 10,000 yuan a square metre to acquire land at local government auctions.
Overall, as the first of the two charts below shows, prices for housing land in the mainland's major cities doubled between the beginning of 2009 and the start of last year.
The boom delivered a bonanza for local governments. As the second chart shows, their revenues from land sales nearly tripled, from just over 1 trillion yuan in 2008 to almost 3 trillion last year, allowing them to finance ever more ambitious investment projects.
Now, with the central government attempting to rein in bank lending, state companies' willingness to bid silly prices for land at auction is likely to cool, eating into local government revenues. This year's budget anticipates a 32 per cent drop to just short of 2 trillion yuan.
But even that may be expecting too much. As Vincent Chan, China strategist at Credit Suisse, points out, 2 trillion yuan would still be 40 per cent higher than land sale revenues in 2009, when the lending orgy was in full swing.
With the government now in monetary tightening mode, officials trying to cool the property market, and developers sitting on extensive land banks, he warns that local government land sale revenues could plunge by more than 50 per cent this year.
With income from land sales making up between 80 and 90 per cent of local government revenues over recent years, such a big slide in auction proceeds would clearly knock a hole in their ability to finance Beijing's programme of public housing construction.
Of course, the central government could be less aggressive about curbing bank lending so that funding sources do not dry up, but that would make it more difficult to get a grip on inflation.
Alas, making life affordable is going to be tricky.



Anti-inflation policies at odds with home-building promises