TO THE POINT: The government vows to control the real estate market after a year of robust growth. To diversify financial investment tools, the regulatory authorities approved the launch of stock index futures, and short selling and margin trading to allow investors to hedge against risks. China overtakes the United States to become the world's biggest auto market in 2009. The country is also expected to become the largest consumer market in the world by 2020. Google threatens to halt its China operations if it cannot reach a censorship agreement with the government.

By LIU YUNYUN

Property Trap

The Central Government is "sparing no efforts" to prevent housing prices from increasing too rapidly.

On January 10, the State Council issued a notice "promoting the stable and healthy development of the real estate market," intending to guide the "rational housing consumption," and restrain speculative apartment and house purchases. The government also pledged to restrict land stockpiling and frequent land transactions between developers, according to a press conference held January 13.

But the question is: who is responsible for the property price surge? While many blamed developers for their greediness and applauded the government's determination to crack down on the bubbling real estate market, few took into full consideration the government's actual role.

Selling land has become one of the major sources of income for many local governments. The land use right transfer fee accounted for almost 50 percent of Beijing's and Shanghai 's fiscal revenue, according to E-House (China) Holdings Ltd., a real estate services company. Competition among developers for land is intensifying, since whoever makes a larger offer at land auctions gets the land. Land transfer fees in 2009 stood at 1.5 trillion yuan ($220 billion), double those of 2008, according to figures from the China Index Academy, a real estate research institute.

Analysts agree the increasing fees are a risky signal, as land has not only become a major source of government income but also a source for the government's investment in public welfare. Many guess the government will not allow property prices to fall too much.

But any bubble will take time to burst. In 2009, the problems concerning property use for commercial purposes began to emerge. On January 11, about 20 property owners protested at the gate of SOHO's latest project—the Nexus Center--accusing the property developer of failing to lease the office space as it had promised.

SOHO projects used to be best sellers in the Beijing market, but became more of a burden than a benefit in 2009.

"Affected by the financial crisis, commercial properties contracted, arousing conflict between buyers and property developers," said Wang Qiong, a property analyst at Savills China—a real estate service provider.

Eye on the Futures

After years in the making, the China Securities Regulatory Commission (CSRC) finally on January 8 kick started a trial program for short selling and margin trading, as well as the stock index futures in the Shanghai A-share market, giving traders a vehicle to make profits from falling markets.

Margin trading allows investors to borrow money from brokers to buy shares, while short selling lets them sell securities that they do not own, but have borrowed from securities firms. Short sellers then try to buy back the stock at a lower price, attempting to profit from an expected decline in the stock price. Stock index futures are agreements to buy or sell an index at a preset value on an agreed date.

No timetable was given for the program, but the CSRC said preparations for the stock index futures will take at least three months.

Despite the uncertainties, analysts believe this will open a new chapter for the country's equity market, though the trial program is expected to involve tight restrictions on margin requirements and the size of short positions.

The reforms would allow investors to hedge positions against downside risks in volatile markets, and therefore result in greater institutional participation in trading and market liquidity, said Jing Ulrich, Chairman of China equities at JP Morgan. The Shanghai Composite Index had surged nearly 80 percent in 2009 after plummeting 60 percent in 2008.

Another beneficiary are the domestic brokerage firms that will enjoy a sharp increase in transaction volumes and diversification of products and services, said Wang Zhiyong, a senior analyst with the Hongyuan Securities Co. Ltd.

Auto Leader

China overtook the United States as the largest auto market in the world in 2009 with total auto sales of 13.64 million, according to a January 11 press conference of the China Association of Automobile Manufacturers (CAAM) .

CAAM said auto sales had grown at an annual rate of 16.74 percent in the past 15 years. The growth momentum is expected to continue this year. Auto sales in 2010 are expected to reach 15 million.

CAAM attributed the strong figures to the government's stimulus measures, such as halving the purchase tax for low-emission cars and the booming demand in second-tier and third-tier cities.

Amid the devastating global financial crisis, multinational automakers are counting on China as demands around the world plummet. General Motors Co. said 2009 sales in China rose 67 percent from sales in 2008, while its sales in the United States dropped 30 percent. Ford Motor Co. secured 44 percent sales growth in 2009.

China also became the largest market for Germany's Volkswagen AG and Japan's Nissan Motor Co. in 2009.

But Dong Yang, Secretary General of CAAM, reminded domestic automakers not be distracted by the sales revenue figures since they lag behind Western automakers in terms of research and development skills, brand recognition and engineering prowess.

The only Chinese car brand debuted at the North American International Auto Show recently held in Detroit was BYD Co., a Warren E. Buffet-invested private Chinese automaker. BYD announced to launch an electric powered car in the United States by the end of this year, making it the first company to sell made-in-China cars in America.

Largest Consumer

Steady wage growth and fewer savings will put China on a smooth track to overtake the United States as the world's largest consumer market, according to a report recently released by Credit Suisse.

Household incomes of the bottom 20 percent of earners rose 50 percent between 2004 and 2009 while the top 10 percent surged 255 percent. Meanwhile, the average savings rate decreased from 26 percent to 12 percent during the same period, said the report.

The upward trend is likely to continue and will help China account for 23.1 percent of global consumption in 2020, up 5.2 percent from 2009, according to the report.

"At present, the reduced savings are spent mainly on housing, including mortgages and rental payments--a reflection of the desire among Chinese to improve their living conditions, and one that also shows the burden of rising property prices," said Vincent Chan, head of China Equity Research at Credit Suisse.

Google Disconnects?

Global search engine giant Google Inc. faces numerous obstacles in its China operations after becoming entangled in a copyright case involving Chinese authors and its recent threats to pull out of the Chinese market due to the country's Internet censorship.

Google's decision to potentially leave China was partly due to Internet attacks that originated from the Chinese mainland. But Google was not alone. On January 13, users were also unable to log on to Baidu.com due to similar attacks.

Google now holds a 31-percent stake in the Chinese search engine market, while Baidu.com controls the remainder. A day after announcing its possible pullout, Google's NASDAQ share price dropped 1.1 percent while its rival Baidu's price surged 14 percent.

Analysts said the retreat will be a major loss for Google, as Chinese revenue accounted for about 10 percent of Google's global operations. JP Morgan predicted a withdrawal from the Chinese market would cost the company $600 million in losses in 2010. Many fear that Baidu would hold a search engine monopoly over the Chinese market in Google's absence.

"If happens, it would be a zero-sum game for the whole industry as well as Google itself," said Lu Benfu, an Internet expert at the Chinese Academy of Sciences.