BusinessMirror

China’s escalating property curbs point to Xi’s new priority

Fter a years-long campaign to tame property prices, China is upping the ante to break a stubborn cycle of gains that’s made homes increasing­ly unaffordab­le.

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AAll signs point to the government’s determinat­ion to ensure social stability, even if it spells near-term turmoil for capital markets. Just in June, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, warned against betting that property prices will never fall.

In recent days, China jacked up mortgage rates in a major city, vowed to accelerate the developmen­t of government subsidized rental housing, and moved to increase scrutiny on everything from financing of developers and newly-listed home prices to title transfers. Echoing Xi Jinping’s famous words that “housing is for living in and not for speculatio­n,” Vice Premier Han Zheng added that the sector shouldn’t be used as a shortterm tool to stimulate the economy.

The intensifie­d focus on real estate—an industry that was already under the scanner—mirrors broader crackdowns on businesses such as education that are seen as widening social inequities. As China’s economy slows and President Xi tries to increase the nation’s birth rate, the policies underscore the Communist Party’s growing resolve to respond to mounting dissatisfa­ction with hoarded wealth and narrowing avenues for advancemen­t.

“China’s property sector has been one of the biggest sources of discontent and the government is hell bent on controllin­g prices so it doesn’t lead to social unrest,” said Beijing-based Liao Ming, a founding partner of Prospect Avenue Capital. “The measures echo the policy curbs in education in that they are aimed at easing public angst against inequity.”

While China has spent years trying to cool property prices, analysts say this round of crackdowns will be different. One clear signal came in Vice Premier Han’s comments on steering away from using real estate to provide short-term boosts for the economy.

“In the past, Beijing has consistent­ly used the property sector to stabilize overall growth,” Nomura analysts led by Lu Ting wrote in a research note, adding that they expect Beijing to change its playbook. Policy makers won’t lift property restrictio­ns this time partly due to concerns about a systemic financial crisis, the analysts wrote.

Another signal came from the unusually large number of government entities that vowed recently to strengthen measures on everything from project developmen­t and home sales, to rental and property management services. Eight policy bodies said in a joint statement that they would step up penalties for misconduct. In the line of fire will be developers that default on debt repayments, delay deliveries on presold homes or elicit negative news or market concerns.

Local bureaucrat­s’ careers are on the line. Officials in cities that lack sufficient regulation­s and experience rapid price spikes will be held accountabl­e, Zhang Qiguang, an official for the Ministry of Housing and Urban-rural Developmen­t said on July 22.

On Monday, commentary from state-media Xinhua urged government­s across the nation to keep home prices at a reasonable level and make it an urgent task.

“New residents and young people can’t afford to buy or rent good homes,” the editorial said. “Those problems are especially acute in cities with population inflow and metropolis­es.”

Troubled developers

INVESTORS have responded by selling property stocks, with the recent stream of news piling pressure on developers that were already being pressed to deleverage and meet China’s “three red lines” on debt metrics.

China Evergrande Group shares were little changed as of 14:13 p.m. on Wednesday, after plunging more than 40 percent in just under two weeks. A Bloomberg Intelligen­ce index of 33 major Chinese developers mostly traded in Hong Kong dropped for a fourth consecutiv­e day on Wednesday.

China Chengxin Internatio­nal Credit Rating revised its outlook for the country’s real estate sector to negative from stable on Monday, citing concerns about policy tightening and weakened investor confidence.

“Owning property is one of the key ways in which income inequality has worsened in China so the clamp down will come and will be severe,” said Alicia Garcia Herrero, the Hong Kong-based chief economist for Asia Pacific at Natixis. The cost of mortgages will increase, particular­ly for those with multiple homes, as will things like property taxes, she estimated.

The policies are here to stay, Ren Yi, the social media commentato­r and Harvard University-educated princeling otherwise known as Chairman Rabbit, wrote in commentary online.

“The nation’s leaders are looking at this issue from a bigger point of view, property isn’t just an economic tool, it sits at the root of all social economic and political issues, and must be dealt with,” Ren said.

Balancing risks

THE Chinese government needs to maintain a delicate balance. The real estate sector accounts for 13% of the economy from just 5% in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance.

Policy missteps could have unintended consequenc­es for the banking system. Chinese banks had over 50 trillion yuan ($7.7 trillion) of outstandin­g loans to the real estate sector, more than any other industry and accounting for about 28 percent of the nation’s total lending.

Of those loans, about 35.7 trillion yuan were mortgage loans to households and 12.4 trillion yuan were for property developmen­t, according to official data.

But all signs point to the government’s determinat­ion to ensure social stability, even if it spells nearterm turmoil for capital markets. Just in June, Guo shuqing, chairman of the China Banking and Insurance Regulatory Commission, warned against betting that property prices will never fall.

“Property is the single most important source of financial risks and wealth inequality in China,” said Larry Hu, head of China economics at Macquarie securities Ltd. It “is worth watching.”

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