Vested interests keep China property buoyant
Chinese people welcomed in the Year of the Rabbit this year visiting family, playing mahjong, betting on the horses, (among other things), and inspecting the latest flats for sale.
February 18, 2011 / 19:21 IST
Chinese people welcomed in the Year of the Rabbit this year visiting family, playing mahjong, betting on the horses, (among other things), and inspecting the latest flats for sale.
Buying property has become a national passion in China. Last week, Beijing announced further measures in its campaign to cool down both demand for property and real estate prices. It raised interest rates in an effort to induce people to keep money in the banks. It adjusted the way the property price index is calculated in much the same way it earlier adjusted the consumer price index to minimise the impact of rising food prices on inflation. It told foreigners that unless they had paid taxes for a number of years in a given city, they would be unable to buy property. Despite these efforts, though, the betting on the mainland is that the game will continue. Virtually nobody in China thinks there is any chance of a crash in the property market, for a mix of fundamental and self interested reasons.More News From Financial Times
Beijing builds to hold US at bay Beijing must tackle economic challenges Regulator plans clamp on pension bets China downplays levels of 'hot money' China has much to gain from supporting the euro For one thing, there are a lot of vested interests in the government itself that have a stake in rising prices. Most local government revenue comes from land sales. If land prices fall, governments take in less money. So while Beijing announces the latest edicts in a loud voice, local governments undermine that policy in whispers.The bankers, too, prefer to ignore Beijing's wishes. The banks are run by bureaucrats who are all Party members and serve at the behest of the regulators. But beneath the senior echelons of the banks are staffers who wish to grow their loan books and circumvent restrictions on loan growth. Evasive measures were very successful last year, when loan growth exceeded official targets by a wide margin. This year the voices from Beijing have become more insistent so mainland bankers are referring clients to their Hong Kong offices for arrangements to get around inconvenient limitations on the mainland and keep the money flowing. There are other factors as well. Interest rates remain deeply negative in real terms. Everyone in China is looking for alternatives between the gambling tables of Macau and receiving half a percentage point of interest on deposits from their (unfriendly) local bank. Today, these people can put their money out through private channels for more generous returns. For the first time there is a class of wealthy entrepreneurs with enough scale that they have become a significant source of funding, particularly for property. Developers in China cannot get loans to actually acquire land. They can only borrow after they have secured the land. That does not matter much for the larger developers who are listed and cash rich, but it does gives rise to an irritating sequence problem for developers who are not. The problem is solved by introducing developers to well-heeled entrepreneurs who are the clients of the wealth management arms of the banks. Developers often sell shares of the unit that is responsible for a given property project to entrepreneurs via these bank networks, paying them between 10 per cent and 13 per cent a year for the money. In other cases, entrepreneurs themselves form underground banks in search of lucrative projects. Of course, the self-interest of developers and banks does not mean there will not be a crash, just that people want to make money from property. More important from a fundamental viewpoint is the fact that the Chinese market lacks the classic symptoms of a bubble today.One of the reasons why the US and Japanese housing booms were so fragile was the extent to which those booms were financed with borrowed money. If leverage is one of the key worrying signs, there is not much of it in China right now, either at the level of builder or buyer. Also, in contrast again to the US and Japan, incomes in China are rising. Indeed, analysts say that, at least in China's second tier cities such as Chengdu or Dalian or Xian, incomes are rising at a faster pace than housing prices. Moreover, many developers are producing affordable middle class housing and not just luxury flats and shopping malls. The prosperity is spreading with the infrastructure, from the outskirts of Beijing to the outskirts of the whole country.True, official statistics suggest that fixed asset investment accounts for 70% of economic activity and much of that figure comes from property investment. That suggests that the supply of everything that China builds will one day vastly exceed demand. But, as with so many statistics, many analysts dismiss this fear. For example, they point out that when an American buys a car, the purchase counts as consumption but when a Chinese household does so, it counts as investment. Next year is the year of the Dragon, a particularly auspicious year in China. Property owners, if not potential buyers, are betting they will be even more prosperous when that time comes. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
