Realty still hot for long-term players

China's property market is likely to witness a fresh round of tightening, following Premier Wen Jiabao's recent statement urging local governments in second- and third-tier cities to curb home purchases when real estate prices rise rapidly.

The restrictions will be an extension of similar policies implemented last year in big cities like Beijing and Shanghai, where families are not allowed to buy a third home.

That seems to suggest that property price rises in smaller cities - where many foreign investors had recently increased their investments - will slow down. Prices could even fall.

Figures from the National Bureau of Statistics showed that in June property prices fell in 12 of the 70 major cities monitored, and remained unchanged in 14, measured against figures in May. That indicated that China's property sector continued to cool as the effect of tightening policies became evident.

The scenario also sparked fresh calls to steer clear of Chinese property stocks and the realty market.

On June 15 Standard & Poor's cut its outlook on Chinese property developers from "stable" to "negative", citing the possibility of further government curbs. In April Moody's Investors Service changed its outlook for the Chinese property sector to "negative" from "stable".

In recent times, there have been several telltale signs that the Chinese government is keen on curbing the skyrocketing property prices and to prevent the real estate sector from overheating.

Such concerns arise as the fast-growing property market drains a considerable chunk of existing financial resources and leaves the local government reliant far too much on land sales to boost revenues. If this trend is not rectified, then China will suffer a fate similar to what Japan underwent in the early 1990s, when a realty market collapse almost derailed the growth phase of the Japanese economy.

But at the same time, the government is also keen to ensure that the property sector is curbed. An ultra-buoyant property sector is considered not good in China's economic transition from manufacturer and exporter to a consumer. This is especially so as higher realty expenses will considerably reduce the funds available for spending on other items.

That scenario will also lead to an ailing economy and deter innovation and industrial upgrading. After all, there is no major economy that simply relies on the growth of the property sector to become wealthy and healthy. So it becomes more clear as to why the Chinese government is willing to risk an economic slowdown to check the runaway property market.

Foreign investors, however, have braved the tightening policies and increased their property investments in China to $26.6 billion yuan (18.51 billion euros) in the first five months of the year, a year-on-year growth of 57.3 percent.

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