Why China’s policymakers are caught in a property double bind

If an ever-increasing pile-up of unsold flats in small cities wasn’t worrying enough, Chinese policymakers are now grappling with an even bigger problem – a property price bubble in major cities.

Beijing’s steady policy support to the property sector since late 2014 to prop up one of the country’s most important industries has resulted in runaway prices in major cities while home sales in smaller cities have hardly budged, creating an intractable market duality that has made any uniform property policy difficult to implement.

The bubble fear is particularly pronounced in Shenzhen and Shanghai. In Shenzhen, the country’s third biggest city after Beijing and Shanghai, home prices jumped 72 per cent last month from a year ago. The same month, a new project in Shanghai priced at over 80,000 yuan a square metre sold 352 units in one day.

“The recent easing policies have spurred the market in first-tier cities, triggered by the expectations of greater appreciation,” said Ding Zuyu, chief executive of E-House China, a real estate services company. “The mood is too upbeat.”

After the central bank’s six interest rate cuts that have brought down the country’s mortgage rates to a record low, China has this year brought in a raft of measures aimed at boosting home sales. These include slashing down payment requirements, transaction taxes, and a cut in bank reserve requirement freeing up more cash to be pumped into the market.

While these moves were aimed at boosting demand and reducing inventories in smaller cities, they have only added fuel to a sizzling property market in first-tier cities while barely helping sales in smaller cities.