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Beijing Review Exclusive
Special> Coping With the Global Financial Crisis> Beijing Review Exclusive
UPDATED: October 27, 2009 NO. 43 OCTOBER 29, 2009
Risky Property Investment
Market insiders have started to warn investors that the asset price inflation has moved to a stage where property is becoming a risky short-term investment
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As far as housing investment’s negative impacts on the macroeconomy are concerned, China has learned from other countries, like Germany and France, which experienced relatively mild fluctuations in their economic circles as assets are less of an investment tool there. By contrast, economies like the United States, Japan and Spain, which suffered from turbulent economic downtowns during the last economic cycle, are more tolerant toward viewing housing as an investment.

A major barrier to China’s sustainable economic development is its high saving rate and low consumption, a structural defect that has become even more obvious in the wake of the financial crisis. Thus China lists consumption expansion as a key task of its macroeconomic control policies. However, giving residents incentives to spend more should not go beyond control. Boosting consumption should be based on the growth of residents’ disposable incomes. In the context of a hot property market, slow growth of residents’ disposable income and frequent adjustments to interest levels, people buying homes at a lower mortgage rate may find themselves unable to pay their mortgages after interests experience an upturn. Therefore, the Chinese Government also needs to take measures to prevent a consumer credit explosion, like that experienced in the United States.

Suggestions to market supervisors

Property market supervisors in China should adhere to three long-term policies. First, the government should distribute rental subsidies to low-income groups and guarantee the construction of affordable housing by providing efficient construction land and capital while trafficing infrastructure support. The government will have more leeway to adjust property market policies after guaranteeing people’s basic needs and social stability.

Second, the government must adopt taxation and financial tools to reduce investments in the property market. This should be a long-term policy. To achieve this goal, state-holding companies should be required to enlarge their capital dividend programs and their programs to sell part of their state-held shares. Therefore, large state-owned enterprises can no longer repeat a vicious investment cycle of putting their extra money in the asset market, making money and enlarging their investment in housing. When state-owned enterprises became land buyers of the largest deals in many Chinese cities, their speculation further pushed up local housing prices. The second tool is to limit foreign investment in China’s property market and encourage foreign capital into management- and technology-intensive projects. The third tool is to increase the taxation burdens on property investment, including procedures to levy property tax.

Third, the government must strictly supervise the implementation of financial regulations of the property market. Second homes’ higher down payment ratio must be implemented, and property development companies must meet the requirements on the ratio of their own capital.

The government and companies should not frequently adjust their policies over the definition of second homes, down payment ratios, mortgage interest rates and taxes on property sales.

The popular public opinion that activeness of the property market is mainly decided by government financial policies is wrong, dangerous and in need of change.

When the economic cycle fluctuates most violently, the government should be warned against the excessive use of monetary policies, which could spur speculative investment in the property market.

While using financial tools to stimulate credit consumption, the government should not ignore the property’s dual nature as a form of consumption and an investment tool, while overlooking the risk of the property market boom on the macroeconomy. Therefore, the macro-control policies on the property market should be measured against the long-term development of the economy, consumer product prices, credit supply and the balance of international payments.

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