China Eyes Property Boost

Growth lag could ease housing curbs.
An analysis by Michael Lelyveld
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A pedestrian walks past commercial office buildings under construction in the Binhai New Area in Tianjin city, June 26, 2012.
A pedestrian walks past commercial office buildings under construction in the Binhai New Area in Tianjin city, June 26, 2012.

China's slowdown in economic growth has started to raise doubts about the government's crackdown on the property sector, experts say.

So far, Premier Wen Jiabao has shown no sign of easing his tough policies toward the real estate market despite the government's July 13 announcement that second-quarter GDP growth of 7.6 percent was the weakest in three years.

"By no means should we allow housing prices to rebound," Wen said, according to the official English-language China Daily. "We must unswervingly continue macro controls over the housing market."

Wen's campaign to curb property speculation and bring housing prices down has been supported by other top officials including Vice Premier Li Keqiang.

"The control policies on the property market should be stabilized and their achievements should be consolidated," Li said at a conference on affordable housing in June.

The government has been targeting the housing market for the past year after prices in some cities surged 40 percent in 2010, sparking discontent among those who could not afford to buy.

Higher down-payment requirements, restrictions on second-home purchases, and property taxes have helped slow the rise, but have also led to hard times for construction-linked industries including steel, cement, and flat glass.

Official concern

In what may be a sign of concern about the policy and its effect on the economy, an official Xinhua news agency report on July 15 cited the crackdown as contributing to the slowdown for perhaps the first time.

"Dragged down by lackluster external demand and government efforts to cool the property sector, the country's GDP growth slowed to a three-year low of 7.6 percent in the second quarter," it said.

The same report carried a warning from Wen that the "economic rebound is not yet stable and economic hardship may continue for a period of time."

In a July 17 report, Xinhua went further in citing the cause of the slowdown, calling it "more of a result of Beijing's self-initiated efforts to restructure its economy" than external factors.

Economists have generally supported the government's property policy for months, reasoning that a let-up would lead to a resurgence of investment in the overheated sector, reigniting inflation and housing costs.

But with the economy faltering and inflation well below the government's 4-percent target at 2.2. percent in June, doubts about the property curbs are on the rise.

Bad timing?

Harvard University economist Dale Jorgenson said the government was heavy-handed with its massive 4-trillion-yuan (U.S. $627-billion) stimulus program in 2009 and is trying to deal with the consequences of the building boom now.

"It's kind of a bang-bang effect. They overdid the stimulus, and so they took very strong action on the property front. It's kind of hard to manage all these things," Jorgenson said in an interview.

The stimulus kept China's economy cranking through the first phase of the global downturn, but the curbs to cool the property market have run into bad timing as the second stage of economic trouble has emerged with the European debt crisis.

The clash of forces has left the government with policies that are trying to limit the economic downturn and the housing bubble at the same time.

"Nobody, including the management there, anticipated the slowdown in the world economy," said Jorgenson.

"If you had perfect foresight, you could say you should have seen that Europe was going to slow, and it's a big market for your exports," he said. "But the combination of external forces, as they emphasize, plus their policies probably were a little bit too stringent."

Long-term redirection

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, said that China's government now sees a need for long-term redirection of the economy.

"The big question facing the Chinese leadership is whether they have measures to shift demand outside of property and outside of exports, and that's not easy to do," Hufbauer said.

Since the stimulus program started to wind down, the government has embraced Western calls to move from an investment and export-led economy toward greater reliance on consumption and sustainable growth.

China has a host of social needs like health care and education that do not rely on the familiar resource-intensive growth that comes with construction.

"If they have concrete plans on those and they put something in that's pretty forceful, they don't need to gin up the property sector," said Hufbauer. "But if they don't have anything and they take away the property sector, then they've taken away a big part of the economy."

Chinese leaders regularly extol the virtues of a consumption-oriented economy, but a shift that shows up in GDP figures is likely to be slower than a construction-led shot in the arm.

"If you were really going to drive the economy with the growth of those activities, it should have started a year or a year-and-a-half ago," said Hufbauer.

'Too much intervention'

For that reason, Hufbauer expects that the government will allow some easing in the property market to avoid the risk of a dip down to the 6-percent GDP growth range before the leadership change next March.

While China's economic policy-makers have been whipsawed by external forces and conditions of their own making, so have investors and businesses as they try to figure out what direction the country will take next.

"Too much intervention makes it very difficult for investors to make the kind of calculations they have to make, to make money," said Jorgenson, citing the uncertainties of Wen's warning.

"They should be projecting a steady-as-you-go approach to policy, and I don't see from this pronouncement that they're moving in that direction," he said.

The latest figures from the National Bureau of Statistics (NBS) have raised doubts that the government's campaign against higher housing prices is working.

In June, 25 of 70 major cities reported price rises, a sharp increase from six cities in May, the NBS said. Twenty-one cities saw declines in June, down from 43 the month before.

In an apparent attempt to dampen speculation, the government issued an "urgent" notice on July 19 that China "will continue to keep a firm grip on its real estate market and consolidate previous achievements so as to prevent housing prices from rebounding."

The statement was issued jointly by the Ministry of Land Resources and the Ministry of Housing and Urban-Rural Development, Xinhua said.





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