[FWIW, WSJ has a tendency to connect everything happens in China with social chaos. What a joke]--"China Fears Social Turmoil From Hot Property Market"
Cabinet Says Rising Prices
Could Accelerate Inflation;
Shanghai Seems Targeted
By JAMES T. AREDDY and PETER WONACOTT
Staff Reporters of THE WALL STREET JOURNAL
March 31, 2005
SHANGHAI -- China's cabinet, worried about soaring home prices and possible social unrest, is warning officials at all levels they are responsible for keeping the country's property market from overheating.
In a strongly worded circular sent to local and central-government officials, China's powerful State Council warned that rising property prices pose risks to "financial safety and social stability." It said "property price stability" is essential to "the healthy operation of the whole national economy."
The unpublished circular, which is dated March 26, was addressed to provincial governors and mayors, as well as all government ministries, according to a copy seen by The Wall Street Journal.
The document is likely to serve as a politically sensitive warning shot to local Chinese leaders who have used the property market to pump up economic growth. Leaders in Beijing appear especially concerned about the vulnerability of China's banking system, the broader economy and the government's own power to any property-market crisis.
Property speculation is common across China, say analysts, particularly in coastal cities. "In these areas, the puncturing of the property price bubble is only a question of time," according to a March 29 report from China International Capital Corp., a Chinese investment bank.
Shanghai is currently the nation's hottest property market. Chinese from other parts of the country have been buying up property, drawn to the city's fast emergence as China's business center. Foreigners also have poured money into the city, in part to own assets denominated in yuan and play chances the government will sanction a rise in the exchange rate against the U.S. dollar.
Investment in residential property "continues to run too hot," J.P. Morgan & Co. said in a report earlier this month. The U.S. investment bank said that during the fourth quarter of 2004, the total value of transactions in Beijing was 10% higher than a year earlier, while the value surged 22% in Shanghai and 36% in the southern city of Guangzhou.
Soaring property prices pose a direct challenge to Beijing's credibility because the central government has pledged to keep the economy from overheating and narrow gaps in wealth between cities and the countryside. In its circular, the State Council expressed concern that the boom is sending materials costs upward, which could stoke inflation.
In most places, measures to keep property prices under control, such as a newly enacted capital-gains tax in Shanghai on property sales, appear to be doing little to deter those determined to buy a home. Yet a key difference with the latest State Council circular and earlier warnings is that local officials will be held responsible for surging prices. The circular follows widespread rumors that the jobs of top Shanghai officials are already on the line over the issue.
"Essentially, the central government is most concerned about social unrest," said Wang Juelin, deputy director of the Policy Research Center of China's Construction Ministry. Mr. Wang, who hadn't seen the March 26 circular, added, "Shanghai is the most significant target of the policy regulation."
When private housing first appeared as an option to urban Chinese in the 1990s, it was meant to spark purchases of home appliances, furniture and building materials. Owning a home and a mortgage also was seen as a way of sowing stability into communities.
Yet, now, with demand continually outstripping supply -- especially in urban areas such as Shanghai -- much of the recent upward price pressure reflects hopes to make a quick profit.
That in turn increasingly prices out of the market young people and those on fixed incomes. China's mortgage market is too new for banks to have a good idea how well their customers would be able to weather a downturn and continue making payments.
Citigroup Inc. economist Yiping Huang estimated in a February report that nearly 10% of the Chinese banking system's loans in 2004 were for mortgages. He said that this percentage limits risks to the banking system, as the level is far below those in Hong Kong and Taiwan of about 30%. Other economists believe the already debt-heavy Chinese banks can't afford more missteps.
In recent weeks, Shanghai and other local governments have taken new steps to cool property speculation. In March, Shanghai became the first city in China to enact a capital-gains tax on property sales. It now charges 5.5% of a transaction value for any sale done less than a year after a property last was sold. Some banks in the city are refusing to provide mortgages on the same property twice within a year. And the central bank has told banks to require bigger down payments on all property deals.
Jiao Yang, chief spokeswoman for the Shanghai municipal government, said yesterday that Shanghai officials, from the mayor and party secretary on down, have tried "to cool down the property prices" to reflect demands from the central government.
However, some of the measures taken in Shanghai have been counterproductive, according to several property companies. For example, the municipal government has been capping plot ratios -- the amount of development that is permitted on a piece of land -- during the past year to dissuade developers. But some developers say such rules essentially reduce the new supply of apartments and keep prices high.
In a sign the Shanghai property market remains as hot as ever, prospective buyers for a new residential development began camping out for a sale that will begin on Saturday, even though the development is located far south of the city center. The property developer said more than 30 people got in line as early as Tuesday for the chance to buy apartments.
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