A Housing Bubble in China
China Times, Taiwan; 12 October 2010
Facing unprecedented pressure to revalue the Chinese renminbi, Beijing took severe measures against the real estate market with the so-called "Five National Conditions," said to be the most stringent to regulate and control the market in China's history — among them, the usage of deed tax and personal income tax being the most crucial. Beijing, Shenzhen, Xiamen, Shanghai, Wuhan and other local governments immediately responded in succession, introducing stringent local provisions of their own.|
In fact, the mainland Chinese real estate prosperity-development index already slowed from the high point of 105.89 in March to 104.11 in August. However, the current mainland market is quickly cooling under Beijing’s current heavy-handed approach to the real estate market, and I believe the main purpose is to prepare for the future negative effects from a renminbi appreciation. At this point in time, the real estate crackdown at the very least has had three effects:
One is to warn non-personal investment organizations to refrain from entering the market, the second is to give powerful domestic real estate investors pressure to exit the market, and the third is to warn foreign capital not to take advantage of the renminbi's appreciation and manipulate the real estate market and create a bubble.
Beijing's emerging heavy-handed approach has not gone without trace, although overall, the real estate market clearly has already cooled off but still has several shocking figures for Beijing, including the national real estate development investment amount, which increased by 36.7 percent from January until August.
Over the same period of time, nationwide housing sales by square footage and market price declined, but the rate of growth for commercial/office sales by square footage increased from 30.3 percent to 33 percent. In addition, sales amounts for commercial and office properties increased more than 56.4 percent and 47.7 percent, respectively.
Furthermore, since August 70 large and medium mainland Chinese cities’ housing prices remain at more than last year's 9.3 percent rise, only with a relatively tiny fall in July. In addition, August’s new residence construction price, compared to last year's new construction price, rose 11.7 percent. Medium- and high-grade residences’ price rates increased more than 15.1 percent.
This data shows that investment focus has shifted to office buildings, commercial buildings and luxury residential sales. Investors clearly are not from the normal house-buying sector but are so much funded by “hot money” that they can aim at foreign capital. So Beijing, to a high degree, must take precautions and dare not lower its guard.
Allegations of foreign "hot money" real estate are definitely not without grounds. From the end of June of last year to the end of June this year, mainland China's foreign exchange reserves increased by $508.3 billion, in which only $251.36 billion is trade surplus.
Utilization of foreign capital over the same period totaled $155.4 billion; that is, after deducting the trade surplus and foreign direct investment, the remaining "hot money" reaches upwards of $101.5 billion of "hot money" (equivalent to more than 700 billion Yuan RMB). This year, Shenzhen and Shanghai's stock market prices increased a little; the majority of profitable funds entered the real estate market via various channels.
The weak U.S. dollar was precisely the main culprit helping swell the Chinese real estate market. Rampant on the wave of "hot money" inflow in the first half of 2006, the renminbi appreciated almost 1 percent. The appreciation immediately brought about an increase in housing sales’ prices by 10.2 percent. These increases forced Beijing to release their "opinion regarding foreign capital entering the real estate market."
This laid out clear-cut standards and norms for foreign business investment in the Chinese real estate market and developed strict operations and management, including a mechanism for foreign and individual purchase and management of property. These concrete measures only help constrain the increasing real estate prices for a short time.
We believe that during this wave of unprecedented pressure for the RMB to appreciate, a crackdown on foreign “hot money” speculation in the housing market is absolutely necessary. Especially deserving attention are so-called first-tier cities’ luxury residences and offices, as well as commercial properties turning into a target for public criticism and censure, and the question is whether or not the real estate "hot money" will flow to second- and third-tier cities.
Therefore, besides the "Five National Conditions" to control "hot money" inflows into the housing market resulting in a housing bubble, the People's Bank of China should contrast the situation of Taiwan Central Bank's investigation into not immediately investing foreign capital, especially when planning to inject capital into the stock market.
Within the convergence of the next week, they can immediately expel with brute force those who violate the law and intervene in the real estate market so as to reduce real estate speculation behavior. But this should probably be of last resort, and they should consider the stock market option.
Finally, we must remind ourselves that American economic power is built on the dollar holding a monopoly, it being the international currency. The American dollar maintains a high rate of exchange on account of its strong backing. Nowadays, America treats mainland China as a developing country and is exerting strong pressure for the appreciation of the RMB, which is resulting in “hot money” inflows into the Chinese real estate market.
In a very short time, the real estate bubble will burst, and China's market will tumble, impacting on the already-sluggish worldwide economy. I'm afraid that the United States is doing more harm than good.