Steps taken to tamp down real estate market
By Liu Jie (China Daily)
Updated: 2004-05-24 09:18

While economists are debating whether a real-estate bubble is in the making, the Chinese Gov-ernment is taking firm measures to cool off the property market.

Believing that the property sector is showing signs of overheating, which could have a serious impact on the banking and other economic sectors, the central bank has already come up with measures to restrict loans to finance property projects.

As early as February 26, the China Banking Regulatory Commission issued a set of draft rules that seek to strengthen the supervision on real estate loans, which cover those from land trading and real estate development to the individual mortgaging of housing and apartments.

"The stricter loan policy is aimed at dampening property investment that is threatening to push property prices to unsustainable levels," said Chang Xiuze, a researcher with the Macro-economy Research Institute of State Development and Reform Commission.

Adhering to the central government's policy, some local governments issued policies recently to set limitations on property speculation.

In Wenzhou, a prosperous city in East China's Zhejiang Province, commercial banks said they would not give mortgage loans to buyers who wanted to purchase their fourth properties, as a group of the city's elite was buying housing in other areas.

They would sell the property for a profit after the prices shoot up or rent them out as long-term investments.

Moreover, when buyers in the city purchase their third homes, they will have to pay higher interest rates if they apply for loans from banks.

This month, banks in Beijing followed Wenzhou to issue a similar policy.

Experts say escalating property prices have increased the risks of banks, trust institutions and housing funds which are doing a roaring business in mortgage financing, thanks to the booming market.

"When the property bubble bursts, many speculators could default on their loans because they won't be able to sell their holdings readily," said Chang.

Official statistics show that real estate investment amounted to 11.31 trillion yuan (US$1.36 trillion) in 2003, up 37.6 per cent from 2002.

Meanwhile, bank lending to the property sector jumped 45.4 per cent to 312.5 billion yuan (US$37.65 billion) from 2002 to 2003.

At the end of October, about 10 per cent of non-performing loans, totalling some US$1.6 trillion, were made to the real estate sector.

Of the total non-performing property loans, 60 per cent was provided to developers and the rest was mortgage lending to home buyers and speculators.

While spelling out the restrictive loan policy, the central government has also called for stricter supervision for trading in land use and stipulated other measures.

In line with the specific conditions of different regions, some local governments have formulated supplementary regulations to cool the property industry.

For instance, Beijing, where land prices are among the highest in the country, forbids the contractual transfer of State-owned land to private developers. Since January 9, all land has had to be sold by public auction.

"The fresh policy increases the land trading transparency and prevents the possible drain on State-owned assets," said Yu Xiuqin, the Beijing Statistics Bureau's spokeswoman.

In Shanghai, the most prosperous city in East China with the highest Chinese real estate prices, has banned the sales of pre-completion properties as of mid-April to discourage speculation.

Meanwhile, it tries to encourage the development of affordable housing with incentives such as preferential taxation and special financing arrangements.

Slow response

Despite the calls and measures and increased supply of new apartments, the real estate market has shown few signs of cooling off as property prices have continued to surge.

A survey jointly conducted by the State Development and Reform Commission and the National Statistics Bureau, shows that real estate prices in China's 35 key cities chalked up an average increase of 7.7 per cent in the first quarter of this year.

The Shanghai market topped the price increases with growth of 28.3 per cent. The average price of apartments in Shanghai, at 5,118 yuan (US$617) per square metre, has taken over the mantle from Beijing.

Meanwhile, the supply of new apartments in Shanghai is also rising. The percentage increase of new apartments is estimated to represent double-digit growth.

The boom of the property market coincides with the rapid economic development in China, especially in urban areas.

The growth has been largely fuelled by rapidly rising living standards, resulting in a strong demand for better housing, according to Yang Shen, president of the China Real Estate Industrial Association.

But Yang noted that the sharp or irrational price surge is backed by some local governments' lack of strict land and price management and speculative activities.

Identifying the property sector as a pillar industry to drive economic growth, these provincial and city governments have concentrated resources on promoting real-estate developments in their respective jurisdictions.

"Their way of conducting the land-use rights trading has resulted in over investment, poor city planning and rampant speculation," said Yang.

The property buying spree of the so-called "Wenzhou gangs" is a case in point. These groups of well-heeled individuals from Wenzhou, a prosperous city in East China's Zhejiang Province, recently went from city to city buying prime properties with the aim of reselling them for quick profits.

Their high-profile speculative activities have drawn much criticism from the press and raised a storm of controversy.

In some cities, they were blamed for distorting the property prices through their substantial purchasing power.

"The direct result of their action is the sharp increase of real estate prices in some cities, such as Hangzhou, Suzhou and Shanghai," said Yin Zhongli, PhD, of the Chinese Academy of Social Sciences.

Yin warned that rampant speculation had the effect of exaggerating market demand in those affected cities.

Rough estimates show that the Wenzhou housing purchasing groups had more than 100 billion yuan (US$12.05 billion) at its disposal.

But not everyone was offended by their blatant exploits.

"I don't think they are speculating and disturbing the market," said Ji Rujin, vice-director of the Real Estate Research Institute, which is affiliated with Tsinghua University.

"Buying a house is just another investment tool, like buying shares, and prices will always fall in line with supply and demand."

The group selected property because they believed in the inherent value of real estate, said Ji.

While stricter loan policies have greatly curtailed the buying power of domestic investors, international investors are taking the chance to become more active in China's real estate market.

Singapore-based CapitaLand Ltd, the largest listed property company in Southeast Asia, recently established a residential fund in China focusing on investing in medium- and high-end residential projects in Beijing and Shanghai.

"Initially, we had planned to issue a US$100 million fund in China, but now we are considering doubling the amount," said Lin Mingyan, chief executive officer of CapitaLand China Holding Group.

Several other international financial institutions, including Morgan Stanley, the world's largest investment bank, Lehman Brothers, Rockefeller, Australia's Macquarie and Singapore-based GIC, have also established their respective funds to invest in China's real estate industry.

"Their entry into the market has expanded the funding source for developers," said Chang. But "because of the uncertainties in the Chinese property market, these foreign financiers are cautiously testing the market with small investments."

The majority of Chinese real estate developers seem to share the same belief that property prices will continue to rise in the foreseeable future.

But it is not likely to be a straight climb upward.

Many experts are expecting that property prices are going to stabilize in the longer term despite occasional fluctuations.

The property price trend is expected to track the growth of the national economy, which is going through a government-initiated macro adjustment to ensure healthy and sustainable growth.

"The real estate prices do have direct and close relations with the national economy and people's livelihoods," said Zhao Xiao PhD, a researcher with the Economy Research Center under the State-owned Assets Supervision and Administration Commission of the State Council.

Many economists hold the view that the property market is too important economically and socially, meaning the government needs to ensure its healthy development while satisfying its special need.

Keeping the balance and protecting the interests of various sectors, including developers, financial operators and the general public, may be one of the toughest issues facing the government, according to economists.

"In addition to the financial sector, some governmental departments are considering the formulation of a series of rules to squeeze the bubbles and further legalize and standardize the market," said Zhao.

He cited the taxation sector as an example. Tax on commercial housing transactions may be increased to prevent speculation.

Zhao also emphasized the importance of information disclosure and index release systems.

"Such mechanisms, enhancing the transparency of the property market and providing guidance for not only developers but also the people, should be further improved and strengthened," he said.

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