Columnists

Home prices: a threat to the economy

By You Nuo (China Daily)
Updated: 2010-03-01 13:07

Despite all the official statements and policies that have recently been rolled out from Beijing, people still have a lot of questions about the prospects for the Chinese economy.

Will there be rampant inflation to force the government to pull the brake - abruptly, clumsily, and dangerously as it did during 1990s?

Will the economy manage to ease off adding to the large cities' property development - before the industry takes the nation hostage and ruins its overall health? Will there be safer channels for society's investment enthusiasm now that the central government is already acting to pour cold water on property and stock markets?

In a rather Taoist logic, all the questions boil down to a single one: This society has taken an enormous dose of capital supply, from the 4-trillion-yuan ($590 billion) stimulus package designed in late 2008 to mitigate the global financial crisis. Now, when it is coming to use that amount of money, how can it avoid allowing it to affect market prices in a big way?

Using macro-economic theory, that is almost impossible. So much money will inevitably push up general prices.

But on a technical level, efforts must be made in this mission impossible, to diffuse the pressure, to assuage society's pain, to stay clear of the worst scenario. A crisis is clearly building up. For Chinese economists, centralized interference already looks unavoidable, after property prices rose sharply, and in many cases more than doubled, in the first-tier cities. The surest way to have the investors lose their shirts is to have all of them betting their money on the same thing. And the easiest mistake they can make is to waste their money on the property market, as we have seen in many economies.

Now, when urban housing prices are becoming politicized and one of the issues that attracts the most widespread protest on the Chinese Internet and, in reality, is rapidly depriving the large cities of their appeal to the valued young professionals and skilled workers, interfering in the property market is becoming almost a government duty. In a country of 1.3 billion where using administrative measures to shore up speculative waves is nothing new, Beijing would be tempted to place as many caps as possible on the bubble.

If this indeed happens, along with some tightening of the credit supply, the two traditional investment markets (property and stocks) are unlikely to keep up their momentum as the speculators might expect. The China property bubble would, as a result, see a slowdown in its growth and attraction to new investment interest.

Last year's stimulus money will remain, and investors, institutional and individual, are keenly looking for returns from channels less interfered with by the government. Hong Kong is already seeing an increasing influx of mainland money in its property market. In the meantime, of course, there will be some money channeled to new public infrastructure (by local governments), to new technologies and new services (by more startups and private equity), and to small enterprises (by individuals where the right incentives are provided). None of these is likely to change the total investment structure quickly.

The author is business editor of China Daily