China Shuns Stimulus Calls

Premier Wen Jiabao's policies face test of time.
An analysis by Michael Lelyveld
A pedestrian walks past commercial office buildings under construction in the Binhai New Area in Tianjin city, June 26, 2012.

China's government is continuing its crackdown on high housing prices despite growing concerns about consequences for the economy.

On Aug. 19, the National Bureau of Statistics (NBS) announced that new home prices rose in 50 of 70 surveyed cities in July despite Premier Wen Jiabao's two-year campaign to drive prices down, the official Xinhua news agency said.

Twice as many cities saw monthly price hikes as in June, according to the NBS.

The renewed strains for home buyers defied a series of strong central government measures.

In July, the State Council dispatched eight inspection teams to 16 cities and provinces to report on compliance with price control rules.

The investigations followed reports that developers and real estate companies had offered new incentives to spur sales and push prices up.

"The inspectors have recommended rectification measures to local governments," the State Council said, adding it would "improve regulation on the basis of the results."

Last week, the Ministry of Housing and Urban-Rural Development warned that the government is studying new measures to strengthen "control of the property market," Xinhua said.

The latest restraints are part of Wen's seemingly single- minded mission to make housing more affordable before leaving office next year.

"The premier has shown himself to be pretty determined to make sure that the property bubble problem is solved," said Yukon Huang, senior associate in the Asia program at the Carnegie Endowment for International Peace and former World Bank country director for China.

"He is interested in making sure that the new generation of leaders to be named this fall will be coming in with the economy reasonably OK," Huang said in an interview.

Wen has tried to douse property speculation by requiring higher down payments, discouraging second home purchases and introducing property taxes in some cities.


Over the past year, the crackdown has helped to slow price hikes from the speculative building boom that followed the government's 4-trillion yuan stimulus (U.S. $629-billion) plan in 2008.

Average housing prices rose 24 percent in 2009 and 19 percent in 2010, according to NBS and industry estimates. But prices last December were up less than 3 percent from a year earlier, The Wall Street Journal said.

The problem is that Wen's straitjacket on the property sector may be hindering recovery from the economic slowdown at a time when external factors are also tying down trade.

"As a consequence, he's made it very difficult for the recovery to rebound," said Huang, who estimates the property sector may account for 20 to 25 percent of GDP.

Real estate curbs may also be keeping the People's Bank of China (PBOC) from faster easing of monetary policy to deal with the slowdown, since new money could quickly flood back into speculative property investment.

"Rising property prices are restraining aggressive policy action from the central bank, said Zhang Zhiwei, chief China economist at Nomura Holdings in Hong Kong, as quoted by Bloomberg News.

The PBOC has lowered its high reserve requirement ratio for banks three times since November and cut interest rates twice. But new loosening steps expected for weeks haven't materialized.

Instead, the government has insisted that "fine-tuning" of existing policy rather than stimulus or big monetary moves will bring the economy around in time.

The PBOC "has no intention of cutting banks' reserve requirements in the short term," it said through its Financial News newspaper on Aug. 21.

But pressures seem to be mounting. On Aug. 23, PBOC Governor Zhou Xiaochuan said the central bank "will not rule out the use of any policy tools."

Zhou spoke after the PBOC injected more liquidity into banks for the second time last week through reverse repurchases of securities. The open market operations, known as reverse repos, are seen as the PBOC's preferred course.


But Huang said some of the concerns about policy conflicts be misplaced.

He argues that the government got into the current situation by overdoing the stimulus in the first place, pushing GDP growth up to double-digit levels to skip the global slump.

Now, it is trying to decelerate to a more sustainable growth pace in a short time, while also throttling the property sector, creating a "sharp dip," Huang said.

The sudden turn has driven inventory adjustments, producing an added drag, so that GDP may now be growing at only 5 to 6 percent rather than the official second-quarter figure of 7.6 percent, he said.

The government seems to believe that recovery over the next few months will bring real growth up to Wen's target of 7.5 percent for this year, which would be the "reasonably OK" level that he could leave to his successors.

But if the recovery is weaker, the government would probably still not open the monetary spigot, Huang argues.

"They realize that more liberal monetary policies are not going to help at all," Huang said, because businesses may be too worried about falling profits and other factors to invest soon.

Huang believes the government is more likely to go back to budgetary spending to revive the economy if it drops sharply. So far, that hasn't happened.

But the concern that looser monetary policy would risk re- inflating the real estate bubble is also "probably wrong," he said, since money is already flowing out of China to investments in markets including London, Hong Kong and the United States.

"There's plenty of money around, and what we see is that people are not necessarily buying more because they realize that prices won't increase a lot, in which case, investing in the domestic property market isn't going to be that profitable, anyway," Huang said.


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