Reining in real estate boom
By Yi Xianrong (China Daily)
Updated: 2004-05-13 09:23

After official statistics from the first quarter were released, the debate on whether or not China's economy is overheated was silenced.

With a 9.7 per cent growth in gross domestic product (GDP) and a 43 per cent rise in fixed assets investment, academics and the media both at home and abroad reached a consensus that the Chinese economy is really hot - maybe too hot.

The People's Bank of China, the central bank, anticipated this trend months ago and took a series of measures to cool down investment.

In September 2003, the bank lifted the reserve requirement to commercial banks by 1 percentage point in the hope of reining in their loans to already-heated industries.

In March, the central bank imposed differentiated reserve requirements to banks of varying asset quality.

By now it seems all these measures have not achieved the intended results.

In the first two months of this year investment in iron and steel manufacturing rocketed by 172.6 per cent over the same period last year. Total investment in cement projects that are under construction was 78.6 billion yuan (US$9.47 billion) - a rise of 133 per cent over 2003.

Investment in real estate grew by 43.6 per cent, 6.6 percentage points higher than the year-on-year growth of 2003, while the consumer price index rose by 3.2 per cent and 2.1 per cent in the first two months respectively.

People cannot help asking why all these monetary policies appear to be of no avail in the face of the sustained rise in investment.

As a matter of fact, the strong growth in domestic investment is primarily propelled by the rise of real estate investment.

And the boom of real estate is behind the more-than-reasonable increase in fixed assets investment, bank loans and individual credit.

Some researchers found that when the urban demand for housing rises by 1 percentage point, the GDP grows by 0.137 per cent.

The consumption demand for urban housing grew by 17.37 per cent and 20.32 per cent in 2001 and 2002 respectively, estimated with comparable prices. Then the consumption of urban housing contributed 2.38 and 2.78 percentage points respectively in annual GDP growth.

And this figure is predicted to be even higher in 2003 and 2004.

The breakneck boost in real estate investment will promote the growth of related industries like iron and steel, cement and electrolytic aluminum. The boom in these industries naturally leads to shortages of electricity and energy and transportation bottlenecks.

In 2003, the 36 listed iron and steel companies, the total output of which accounted for 90 per cent of the market, obtained a 44 per cent growth in revenue, 61 per cent growth in average profit and their average profit rate was 12 per cent.

Considering the modest interest level in the financial market, the iron and steel industry is definitely one of the most profitable.

Such lucrative prospects will continue to lure more capital into the sector. Only when the iron and steel sector witnesses a shrinkage in demand, price and profit level will drop and the investment be diverted into other industries.

At the same time, investment in real estate is also driven by local governments.

As most local officials come to the end of their term this year, large sums of capital are being poured into real estate, development zones, infrastructure facilities and other projects that could stimulate GDP growth in a limited time and enhance the officials' performance record.

Coupled with these is the strong will of commercial banks to make loans. The four major State-owned commercial banks saw a steep rise in their revenue in 2003. Apart from their improved operation, the revenue increase is also because of dramatic growth in loans to real estate projects.

Bank loans for real estate development grew by 49.1 per cent over the previous year and individual credit for purchasing houses was up by 47.25 per cent during the same time.

These growth rates were achieved despite the measures taken by the monetary authorities in the effort to curb the bank loan splash in real estate.

And the increase in reserve requirement by 0.5 percentage point, which took effect on April 25, will not have significant bearing upon the banks' lending impulse.

Traditional means like cutting bank loans will hardly achieve the goal of curbing investment growth.

A real to-the-point cure to the problem would be to find out the source of the overheated investment and take appropriate countermeasures.

The current investment fever is unique because it is the result of a boom in the real estate sector. Local governments and banks played important roles in this boom. So multiple solutions should be applied to cool real estate investment.

First, there is a rather long time gap before the monetary policy can really manifest its effect upon the real estate sector. Such a gap could be as long as one or two years.

If investment in real estate does not decrease it is almost impossible for investment in other sectors to be controlled. Therefore, the government should impose more strict conditions on real estate developers attempting to obtain licenses for construction projects.

Second, the most difficult part of the effort is to curb the investment impulse of local governments.

Real estate and infrastructure facilities could quickly propel the GDP growth - that's why they are favoured by local officials.

Officials should answer the call from the central government to have a correct idea of political achievement and maintain a balanced development.

At the same time, local government could raise the price of land and control the profit level of real estate developers.

When real estate profits return to a reasonable level, the investment will drop readily. Then overheated investment in other industries will cool down.

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