• Tue
  • Oct 21, 2014
  • Updated: 9:53pm
CommentInsight & Opinion
REAL ESTATE

Beijing takes gentle approach to deflating real estate bubble

G. Bin Zhao says the Chinese government will adopt a quiet approach to deflating the dangerous real estate bubble, given the huge impact a crash could have on the economy

PUBLISHED : Monday, 10 February, 2014, 1:06pm
UPDATED : Tuesday, 11 February, 2014, 5:04am
 

Despite increasingly strict regulations, investment in China's real estate industry, as well as sales totals and prices, still achieved high levels of growth last year. During the Communist Party's third plenum, the new leadership announced reform measures in a number of areas, but many people were left puzzled by the fact that the real estate sector - the source of the most vocal public complaints - didn't appear to fall within the scope of these new policies.

The real estate bubble continued to grow last year, furthering the unequal distribution of wealth and increasing social tension, and leading many to question the determination of the government to build a more just and equitable society.

The latest official figures show that, last year, national investment in real estate development hit 8.6 trillion yuan (HK$11 trillion), an increase of 19.8 per cent over 2012, accounting for about 20 per cent of investment in fixed assets.

It is well known that the real estate bubble is harmful to the Chinese economy because it attracts and holds capital, talent and other resources that could be better used to develop other important industries, adding to the difficulties of transforming the nation's economy. In some ways, it's like an unexploded bomb; handled carelessly, it could cause economic devastation or, at the very least, lead to an incident similar to the US subprime mortgage crisis.

Many people are concerned that the new leadership has introduced very few important regulatory measures to deal with this impending crisis. The third plenum said little on the regulation of real estate, save for the need "to speed up real estate tax legislation and introduce timely reforms".

Previous leaders tried hard to regulate rising real estate prices, without success. By contrast, the current leadership seems intent to downplay the importance of this issue. Li Keqiang has never publicly mentioned the real estate industry since he became premier, while President Xi Jinping only briefly discussed the core rules for real estate policy last October during a Politburo study. Still, some of the government's recent policies do provide clues about these core rules.

Overall, the government aims to build a market-based system for housing to meet multiple levels of demand, while ensuring the provision of basic housing. This is consistent with the main thrust of the third plenum, that "the market must play a decisive role in allocating resources". The objective is to ensure that everyone's basic housing needs are met.

In other words, the government will not directly intervene in the market, but it will provide basic housing for low-income groups through the development of public rental housing, low-rent housing, and the transformation of various shanty towns.

In addition, the government will work to establish a standardised and stable housing supply system. While increasing supply, it will be necessary to make adjustments as people's needs change. Meanwhile, the total supply of land for housing should be increased, with priority going to building affordable housing.

Clearly, real estate policy has undergone a fundamental change. However, many developers and investors believe leaders are not really talking about "regulation", and therefore mistakenly think policies are becoming looser.

I believe senior leaders realise the significant dangers of a property bubble, and this will be reflected in real estate policies for this year.

Leaders will seek to avoid causing a massive shock to the market with the implementation of any new policies, considering the impact property has on the overall economy. Last year, for example, income from real estate and related land sales and construction was 6.6 trillion yuan, accounting for 36.5 per cent of national public finances, also contributing more than 50 per cent of local government revenue. Therefore, new policy implementation will be gradual and modest. This has contributed to some of the misunderstanding among the public.

Second, once the overall objectives are formally determined, that is, to meet the basic needs of the public, investment behaviour in the market will be limited. The core reason for China's real estate bubble lies in the fact that the market has deviated from the basic demand and supply relationship and become an investment market. Thus, the most effective policy will be to let the market return to its fundamental state; this explains why Xi said regulating housing demand is important.

Also, one should not underestimate the power of the decision during the third plenum to accelerate the introduction of property tax legislation and other measures. Property taxes are implemented in many countries and have proved very effective. They not only inhibit investment behaviour, but also create a substantial income base for local governments. Pilot tax schemes have been running in Shanghai and Chongqing since 2011. Expanding the scope, and the level of tax, will have a profound impact on the market.

In addition, some analysts believe that the plan to create a nationwide unified real estate registration system may lead some people to sell their real estate holdings, particularly those obtained through unlawful activities.

Finally, while the three super-tall skyscrapers in Shanghai's Lujiazui financial district may dwarf those in New York, London or Hong Kong, we should remember the reality: China is still a developing nation no matter how many tall buildings it constructs. Real estate's sole purpose should be to meet the people's basic need for living and working; there are many other, more important issues that need our attention before we can move towards a higher level of civilisation.

G. Bin Zhao is executive editor at China's Economy & Policy, and co-founder of Gateway International Group, a global China consulting firm

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

7

This article is now closed to comments

johnyuan
The damages wrought by investment property to a society finally manifested both in China and Hong Kong (possible the only two in the world) -- the difference only in the degree. Such coincidence otherwise is no accident. China adopted Hong Kong’s selling land for government revenue which is the extreme opposite to US’s giving away land during the opening of the West.
Free lot freed up capital for people to engage in productive activities which revenue for government could depend on for long. It is just common sense – smart and logical which I think made what US is today – the most productive economy in the world for many many years hence. Not Hong Kong.
.
If we were the goose that laid the golden egg, the government in the past colluded with the property developers by hording the eggs to get more without the concern of the well-being of the goose or the efficient functioning of a society. Well, they do that because with the open door policy to the wealth off mainlanders, besides the local goose gets even fatter for a while, the new and old goose one day will all see their property of its paper value incongruent to the true value of a city which is damaged by overcrowding but under supporting by means of making a living. But at the mean time, the goose that can’t laid any golden eggs suffers. All the goose perished. Hong Kong becomes a warehouse of empty buildings.
singleline
As have been argued or implied by many people, RMB may be overvalued at present, by as much as 30 percent according to Lombard Street.
This has been hurting China's export sector, and the SMEs, as shown by the latest disappointing HSBC PPI data.
To add insult to injury, the SMEs have to pay dearly for the loans that can only be obtained in the shadow banking market --- sometimes they can't even get the money even though they're willing to pay very high interest rates.
The rest is history.
China's slowing growth rate is partly responsible for the recent emerging markets' capital flights and the correction of the world's stock markets.
singleline
I hope I'm correct but what follows is my best guess only.
Guided by the current account surplus, and the net capital inflow, China's central bank, the PBOC, deduces that the yuan is still undervalued, or quite near its present equilibrium level.
But the current account simply reflects China's excess savings (savings - investment). The excess savings is always there no matter how high or low the yuan's exchange rate is, at least in the foreseeable future.
A lot of reasons cause the excess savings in China, the most important one being the financial repression that's going on in China.
Also a lot of capital keeps on flowing into China, in the form of foreign direct investment, RQFII, and so on. Some is disguised as exports-invoicing returns.
Most hot money inflows aim to make a one-way bet on RMB through interest rate arbitrage.
These capital inflows and the rising RMB exchange rate mutually reinforce each other, giving the central bank another impression or need that RMB has to rise further.
singleline
And the demand is very strong indeed --- there is no shortage of buyers in China.
Given the high inflation rate in China (no one really trusts the relatively low official inflation rate figures), a sleeping stock market, an undeveloped debt market, lack of investment opportunities in foreign countries due to exchange control, regulated and low deposit rates, and the relatively risky trust products, the only 'safe' way for China's investors to preserve and increase their capital is to invest (or speculate) in the property market.
Some of them don't even have to borrow from the banks --- they simply use their own savings to buy the houses.
They know that the property market in China is now too big to fail --- the authority simply won’t allow it to happen, as shown by the fact that they don’t allow a certain trust product to fail recently.
singleline
If something can’t go on forever, it won’t.
Like those wasteful investment expenditures of China’s local governments and SOEs.
Like Renminbi’s continuous revaluation against the US dollar.
Like the capped deposit rates in China’s banks.
Like the keep-on-rising real estate prices in China’s first-tier cities and elsewhere.
Like those Ponzi Schemes.
China’s property market bubble seems to be a Ponzi Scheme.
Despite the banks’ annual property-lending quota, China’s property developers can raise extra fund, directly or indirectly, through various channels --- shadow banking system, bond market, stock market, Renminbi QFII schemes, etc.
To them even the very high interest cost demanded by the shadow banking system is no matter --- their businesses are still profitable.
The demand for houses is always there.
johnyuan
It is an excellent comprehensive essay on the nature of property development in general and in China. It paints the delicate role current government plays in the gradual process in aligning property role with those played in developed nations.
.
The objective is clear to the author that a developing nation’s property shouldn’t be the only attention at the expanse of others.
.
I will add that if we equate the buildings we live and work in like the rice we eat, we will not tolerate the ever increasing in price due to speculations. Eventually a revolution.
.
China however has been drown in speculation and putting the basic necessity in the heightened awareness of buildings in the context in property market which newspapers have a special section for it and the people talk about it constantly.
.
In fact, it is not strange that you don’t find New York Times or even Wall Street Journal devotes a section to property as a market. The buy and sell information there is mostly for the use of the building.
.
Investment property as a market is not the objective for these papers and there is no market for it – rules keep property investment unprofitable as it should.
.
So CY Leung, what do you think for our property market? Reform? Delink?
johnyuan
I will add that if we equate the buildings we live and work like the rice we eat, we will not tolerate the ever increasing in price due to speculations. The entire nation however has been drown in speculation and putting the basic necessity in the heightened awareness of buildings in the context in property market which newspapers have a special section for it and the people talk about it constantly. In fact, it is not strange that you don’t find New York Times or even Wall Street Journal devote a section to property as a market. The buy and sell information is mostly for the use of the building. Investment property as a market is not the objective and there is no market – rules keep property investment unprofitable as it should.
.
So CY Leung, what do you think for our property market? Think outside the box and delink Hong Kong government from property development. Normalize Hong Kong's economy to become a modern city and not a temporary place to be like a colony. If anyone like to argue that Hong Kong is still a colony, it is not facing the reality but only wanting to continue to hoard any money that could be had.
 
 
 
 
 

Login

SCMP.com Account

or