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Protecting a buying force not trivial
Li Hong  Updated: 2005-06-21 09:12

A string of well-orchestrated government cooling measures have dampened a nationwide frenzy of racing to buy apartments and houses. Now more people are riding on the wall to wait for the windfalls of a big slice of cut in the prices.

Will a substantial slash materialize?

When Xie Jiajing, chief economist of the Ministry of Construction and director of its real estate management department, last week poured cool water on those in the waiting line, her caution caused wild diatribes among Web surfers, who chided her for siding with the property developers.

Xie, possibly on behalf of the Beijing government, said she did not anticipate a deep dive of the housing price at the current stage, because “it is simply not in the interest of the public”.

Potential buyers, annoyed by the senior official’s assertiveness, vowed to freeze deposit accounts in the bank and shun the property sellers for as long as possible till a bargain is given.

One person asked at the popular Internet chat-room,, that Chinese customers, by clenching their wallet, have successfully forced auto dealers to reduce their prices, why can’t they win in a similar bout with the property dealers? Some even called for a boycott.

If such actions are taken, these consumers may reach their goal of purchasing an apartment at half price or even lower. However, many would have to wait for many more years, if not ever, to own a house.

A collapse of China’s urban real estate market, which economists believe would be triggered by a six-month boycott, will have crushing implications on the Chinese economy, one engine of the world’s substantive growth.

A housing market breakdown, as shown in Japan and Hong Kong in the 1990s, may easily lead to a financial and banking system meltdown, and later an economic crisis. A recess in which huge numbers of people cannot find jobs would be nightmarish. In a country with a population of 1.3 billion and where stability is of utmost importance, a small crisis would escalate into a bigger one.

Without income, how can one buy a house? During an emergent contraction of economy, a thing one has to do first is to stuff one’s stomach.

Chinese analysts believe domestic consumption is acting more like a stove firing the country’s robust economic growth. It is a Chinese tradition to be thrifty in eating and clothing, leaving house owning as the single biggest item on the consumption list. If this sector falters, trouble ensues.

No wonder Xie issued her warning: Do not expect a big cut, but a stabilization of the price. She also said that the government won’t let a macro control of the property market risk the safety of China’s financial system, which is undergoing crucial restructuring to discard bad loans and spruce up performance, before foreign giant banking corporations are allowed in at the end of 2006.

Then, does China's sizzling economy need to be slowed down? Or, do China’s real estate bubbles need to bust?

Certainly. When up to 800 people are strewn about on a busy Shanghai bund street, queuing to buy an apartment building whose average pricing is 18,000 yuan (US$2,172) per square metre, one has to ask: why this madness and what went wrong?

A series of mishaps has exacerbated the housing troubles.

The first is price gouging. Speculative dealers in Shanghai and some other coastal cities inform their customers that unnamed tycoons have already snatched up more than half of the apartments just opened for sale, thereby causing a slough in supply and a steep rise of prices.

The second problem is local government connivance and collaboration in hiking the price of buildings. Some deliberately raise the price of land to beef up local government revenue.

The third problem is overseas hot money speculation. Those betting on China’s currency revaluation have bought Chinese assets, hoping to capitalize on a rise in the yuan’s value.

China's policymakers are seen as confident in steering a galloping property market on to a more sustainable path.

Macro control measures such as unfinished apartments forbidden to transfer, rising mortgage rate, and government levying five percent capital gains tax on the sale of all houses built for two years, are quick medicine to a buying spree and market speculation.

However, the control needs attentive tuning, as timely adjustment of the mortgage rate is necessary to protect the buying force. Any bundling of the policies could lead to a property market stagnation, if not a collapse.

The above content represents the view of the author only.
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