21 January 2010

China Seeks to Temper Housing Boom

The Wall Street Journal

BEIJING—Fresh steps to rein in China's booming housing market—one of the engines that has put the country on the cusp of becoming the world's second-largest economy—triggered an international selloff in stocks, as investors grew concerned about the Asian giant's continued growth.

The Chinese government reported early Thursday that its economy expanded 8.7% in 2009, surpassing the 8% target Beijing had set early last year, when some economists were warning that growth might reach only 5%. Growth in the fourth quarter of 2009 was up 10.7% from a year earlier, reflecting the recent recovery in global trade and a continued surge in domestic property and infrastructure.

Consumer prices in December rose 1.9% from a year earlier, the National Bureau of Statistics said, accelerating sharply from the 0.6% rise in November.

That strong growth brings China closer to overtaking Japan as the No. 2 global economy, though numbers from Tokyo won't be out until next month.

As Japan did in earlier decades, China has grown by rapid industrialization, shifting its rural population into cities where people get better jobs and buy homes and consumer goods.

But there is increasing concern China could be headed for some of the same pitfalls Japan encountered leading up to the early 1990s, when its real-estate bubble burst, curtailing growth for years.

Wang Shi, head of China's biggest property developer, China Vanke Co., said last month his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities.

The latest evidence of Beijing's concern came Wednesday, as the government set further controls on the state bank lending that helped fuel the boom by funding new building.

Bank of China Ltd. will stop making new loans for the rest of the month, while several smaller banks will have to hold more funds in reserve, according to people familiar with the situation

The moves followed others in the past week aimed at curbing new loans, spooking investors in China. Shanghai's main stock index fell 2.9% Wednesday, with large declines in banking stocks.

These jitters spilled over into other major markets, contributing to a fall of 122.28 points in the Dow Jones Industrial Average, which closed at 10603.15.

Loans from state banks are the cornerstone of the stimulus programs China put in place amid global slowdown more than a year ago.

As the government gradually withdraws that stimulus, private businesses will need to spend more if growth is to stay robust.

Housing is the best hope for sustaining the gains: According to the World Bank, construction has been the main driver of private-sector investment in the past year.

Other businesses remain reluctant to expand given weakness in the global economy and excess capacity in domestic industries.

"With exports facing hard times, real estate has become an important pillar of China's economic growth," said Ji Zhu, professor of economics at Beijing Technological and Business University. "No one wants to see housing prices fall," he argued.

Prices of new residential property are now rising at an annualized rate of more than 20% nationwide.

High-end apartments in big cities have gained much more.

So far, higher prices have encouraged developers to build more housing, boosting demand for construction workers and raw materials and supporting the overall economy.

Both November and December saw a record volume of construction starts, which are up 75% from a year earlier for the quarter.

Koyo Ozeki, the Tokyo-based head of Asian credit research for bond-fund manager Pacific Investment Management Co., says that comparisons of China's real-estate boom with Japan's speculative bubble are overdone, in part because Japan's economy was much more mature in the 1980s than China's is today.

China is still far behind developed-world living standards, and with its cities expanding and incomes rising, Mr. Ozeki says, plenty of genuine demand for new housing will remain.

But that doesn't mean speculation isn't also a factor in the housing market, especially with wealthy Chinese investing much of their savings in property.

"You do have a secular trend of increasing demand over time. But on the other hand, you could still get a bubble," said Wang Tao, China economist for UBS. "On the ground, there is a certainly a bubbly feeling: People are waiting to buy luxury apartments like they are waiting in line for cabbage."

The risk is that too much new housing is being built at prices too high to ever find buyers, resulting in wasted investments and bad debts that would weaken the economy in later years.

Even without a crash, a housing market that serves only a narrow slice of the urban elite could turn into a political problem for the rulers in Beijing.

The less affluent, like Huang Haiying, a 28-year-old who works for a hospital in Chengdu, have been watching the steady upward march of housing prices with dismay.

She'd like to buy a place downtown near her work, but can't make the math work.

Prices in the center city have already surged past $110 a square foot, which would require her to spend more than half her salary on mortgage payments.

"Some of my friends and former classmates have bought houses here, but I am still watching," Ms. Huang said.

Housing prices in Beijing and Shanghai are now largely out of reach for middle- and low-income families.

Current prices are affordable for the top 20% of the cities' populations, estimates Beijing investment bank China International Capital Corp.

The upper crust is a sizable market—roughly 120 million nationwide—but there are worries the rest are being left behind.

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