China’s Property Controls: Mistaking Forest for Trees

Once again China’s confused policies

From Bloomberg,

China must “unswervingly” continue its property controls and prevent prices from rebounding, Premier Wen Jiabao said yesterday, after the central bank cut interest rates and triggered a surge in property stocks.

Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

Wen’s comments underscore the government’s determination to maintain restrictions on housing purchases even as it cuts interest rates and boosts infrastructure spending to reverse a slowdown in the world’s second-biggest economy. China’s new-home prices rose for the first time in 10 months in June, according to SouFun Holdings Ltd. (SFUN), owner of the nation’s biggest real- estate website.

“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said…

All financial institutions must continue to strictly implement a differentiated housing credit policy to continue curbing property-buying for speculation and investment purposes,” it said in its statement announcing the interest- rate cut.

China started imposing restrictions on home purchases two years ago as prices surged after the government started a stimulus package to shield the economy from the impact of the global financial crisis. Measures included raising down-payments and mortgage-rate requirements, limiting purchases in some cities and trialing a tax on homes in Shanghai and Chongqing.

Property controls are still in a “critical period” and the task remains “arduous,” Wen said yesterday. Cases of illegal acquisition of property-rights must be investigated, he said.

Property Tax

The government must “promote the study and implementation of changes to the property-tax mechanism, and to speed up the establishment of a comprehensive long-term mechanism and policy framework for controlling the property market,” Xinhua cited Wen as saying.

This is an example of the left hand doesn't know what the right hand is doing.

Premier Wen also mistakes forest for trees. Property prices are symptoms and not the source of the bubble. In reality the repeated campaign of monetary policy accommodations compounded by ‘investment spending’ fiscal policies or the Keynesian policies of perpetuating unsustainable quasi-booms has been the culprit

Another manifestation of such bubble conditions has been through China’s version of Shadow banking system which has ballooned to 1.7 trillion which has financed the property bubble.

Yet depending on the debt level conditions, recent rate cuts could reinvigorate speculations in the property sector, if not spillover or get diverted to other sectors of the economy, perhaps in the stock market, commodities or industries that may benefit from “inland development strategy” or euphemism for new pet projects of China’s political authorities.

The inconsistencies of China’s policies will only deepen the uncertainty and of the growing risks of the implosion of China’s bubble economy.