SCENARIOS-What next for China to curb property prices?

January 14, 2010

    By Lee Chyen Yee and Langi Chiang
    HONG KONG/BEIJING, Jan 14 (Reuters) – China is determined to
curb sharp rises in property prices to prevent asset bubbles,
deploying a combination of credit tightening measures, increasing
supply of affordable housing and verbal suasion. 
    This week, China raised its reserve requirement ratio by 0.5
percentage point to absorb excessive liquidity, at a time when
China’s property prices are rising strongly. 
    In December, urban property prices rose by an annual 7.8
percent, marking the fastest pace of 2009. [ID:nTOE60D02M]
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    Following are some possible measures the Chinese government
might take to rein in the surge in property prices:
    
    RAISE MORTGAGE RATES TO CURB LENDING
    More likely.
    Since about a sixth of China’s nearly 10 trillion yuan ($1.5
trillion) in new loans last year went to the property sector,
analysts said the most direct way to clamp down speculation was
to control mortgage lending and loans to developers.
    In October 2008, the central bank cut the minimum mortgage
rate to 70 percent of its benchmark lending rates, with analysts
saying that the authority might raise those rates to around 85
percent as part of efforts to clamp down on speculation.
    “Right now, mortgage interest rate is 30 percent below policy
rate. That subsidy needs to be removed,” Andy Xie, an independent
economist who has warned of a property bubble bursting in China,
told Reuters Insider.
    Apart from major property lenders, such as China Construction
Bank <601939.SS>, and Industrial and Commercial Bank of China
<601398.SS>, developers with high gearing ratio, such as Shanghai
Forte Land Co Ltd <2337.HK> might be hit hard, analysts said.
    The negative impact on major developers with sufficient cash,
such as China Vanke <000002.SZ>, will likely be muted, analysts
said.
    Some analysts also expect the government to raise the
requirement ratio again in coming months to help prevent the
world’s third-largest economy from overheating, in addition to
implementing property-related measures.
    State media said the government had told banks to stop giving
commissions to property agents for mortgage customers they
introduce.
    
    LIFTING DOWNPAYMENTS OF SECOND HOMES FROM 40 PCT
    Likely.
    Another possibility is raising the downpayment of buyers of
second or third homes to a minimum of 50 percent from 40 percent
now.
    This will most probably stifle some demand, but not by too
much, so the negative impact on property developers will be
muted, analysts said.
    “Any measures they take will be gradual as the government
doesn’t want to hamper demand in the market,” said a property
analyst, who declined to be identified.
    So far, the China Banking Regulatory Commission has denied
media reports that it would make such a move in the near term.
    But Beijing has recently tweaked its measures to make it very
clear that it means a second home for the whole family.
Previously, it was ambiguous on that point and some banks were
counting a second home as one for any grown-up member in the
family.
    China has also left it unchanged for the first-home buyers to
enjoy a minimum 20 percent downpayment.
    
    INTRODUCING A PROPERTY TAX
    Least likely.
    For years, the government has been saying that it is
considering introducing a new property tax, but that has not
materialised as some technical problems remain unresolved,
including the registration of residential properties.
    “It will be very risky to do it this year,” David Ng, head of
regional research from RBS said. “It’s better to launch that in a
normal environment.”
    Implementing such a tax will also hit the market hard, which
officials would want to avoid given that the sector is a key
pillar of the economy.
    However, analysts said Chinese officials might raise the
issue time and again as a signal to the market that it was
looking into all kinds of measures to prevent the sector from
overheating.
 (Additional reporting by Rafael Nam; Editing by Lincoln Feast)
 (See www.reutersrealestate.com for the global service for real
estate professional from Reuters)
 ((chyenyee.lee@thomsonreuters.com; +852 2843-6901; Reuters
Messaging: chyenyee.lee.reuters.com@reuters.net))
 ((If you have a query or comment on this story, send an email to
news.feedback.asia@thomsonreuters.com))
 
Keywords: CHINA PROPERTY/ 
   

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 Thursday, 14 January 2010 09:32:58RTRS [nTOE60D02G] {EN}ENDS

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