By Michael Lelyveld
China has been trying to restrain the strongest segment of its economy despite concerns about sagging economic growth.
After months of runaway prices for new housing, more than 20 cities have imposed restrictions on sales to cool the market down.
The local rules include requirements for higher down payments, curbs on second or third home purchases and limits on bank loans.
On Oct. 21, the National Bureau of Statistics (NBS) said in a statement that the measures had started to take effect, based on sales reports for the first half of the month.
Home prices rose 1.2 percent by mid-month in Beijing compared with a 4.9-percent jump in September, while prices rose 0.7 percent in Shanghai during the two-week period after climbing 3.2 percent the month before, the NBS said.
Sales volumes fell between 60 and 80 percent in four surveyed cities in the first two weeks of October compared with the last two weeks of September, the official Xinhua news agency reported.
The unusual report on weekly data is a measure of how closely the government has been watching the real estate surge after warnings that prices may be a bubble about to pop.
According to the NBS economic report for the third quarter, sales of floor space in residential buildings across China climbed 27.1 percent from a year earlier, while values soared 43.2 percent.
Since the government urged cities to impose curbs on sales under speculative pressure, prices have been barely contained.
The regular monthly NBS survey of 70 large and medium- sized cities for September found higher prices in 63 markets, down only slightly from 64 the month before.
For both property investors and first-time buyers, the government’s latest shift on housing policy should sound familiar.
In 2010, former Premier Wen Jiabao ordered a series of down payment and tax policies to discourage speculative investment in second and third homes after complaints that the boom was making housing unaffordable for average families.
Minimum down payments for second homes were gradually raised from as little as 20 percent to as much as 70 percent in some cities by 2013.
But fears of weakening economic growth and builder bankruptcies drove the government to ease and then scrap the restrictions in 2015, reigniting the housing sector.
Now, the government has reversed course again, pushing cities to reimpose many of the previous controls.
In an unusual instance of implied criticism, official press reports have suggested that responsibility for the policy flip-flops rests squarely on the government.
“The latest home price surges came after two years of progressive policy easing, starting with the relaxation of purchase restrictions in 2014,” Xinhua said on Oct. 24. “The momentum was further fueled by the government’s pro-growth policies, including interest rate cuts and lower deposit requirements.”
Burst in bank loans
The newest phase in the boom-and-bust cycle has been boosted by an unchecked burst in bank loans.
Yuan-denominated lending rose 29 percent to 1.22 trillion yuan (U.S. $180 billion) in September month-to-month after doubling in August, according to statements from the People’s Bank of China (PBOC).
International concerns have focused on China’s high corporate debt levels, but 46.5 percent of the credit in the first nine months has been for household loans.
Mortgage lending was up nearly 50 percent during the period. In September, new housing loans rose 76 percent from a year earlier, the PBOC said.
Last month, the International Monetary Fund warned against the surge in bank loans.
In its World Economic Outlook, the IMF said that “the economy’s dependence on credit is increasing at a dangerous pace, intermediated through an increasingly opaque and complex financial sector.”
In a statement on Oct. 24, the China Banking Regulatory Commission (CBRC) ordered “strict control of financial risks related to real estate,” Xinhua reported.
The statement reflects the CBRC’s growing concern that funds from the unregulated shadow banking sector have been financing the property boom.
“Irregular inflow of loans or wealth management funds into the property sector must be banned,” the agency said.
Aside from the government’s credit and investment policies, economists have attributed the real estate binge to controls on the stock market. The regulatory restrictions constrained a similar speculative boom in stocks, leaving capital with few other places to go.
Last month, the Ministry of Housing and Urban-Rural Development launched a crackdown on the real estate industry, identifying nine sales practices as illegal following the arrests of seven sales agents in Shanghai.
“Some real estate developers spread false information that their newly developed houses have sold out, while some property agents spread rumors about tighter policies. Their common aim is to spread panic in the market and press people to rush to buy houses without carefully considering their decisions,” China Daily said.
With the latest interventions, officials have issued assurances that the government is not overcompensating again and risking a setback for the economy.
NBS spokesman Sheng Laiyun said the property sector contributed 8 percent of GDP growth during the nine-month period, Reuters reported. The estimate allowed him to argue that investment restrictions would not have a “very big impact” on growth.
But sales in residential buildings have accounted for nearly 13 percent of GDP this year, based on calculations from NBS data. Sales in all commercial buildings represented 15.1 percent of GDP, marking a greater contribution to the economy.
In the first nine months, funds for real estate development were the equivalent of 130.5 percent of GDP during the same period.
The ‘new normal’
While the government’s interventions may be driving excessive investment from one economic sector to another, Harvard University economics professor Dale Jorgenson takes a broader view of China’s policies.
China’s government is still trying to adjust to the “new normal” model of more moderate economic growth led by consumption rather than investment.
Critics have focused on the pace of China’s credit emissions, but its high savings rate also continues to be a concern.
“China is still saving way too much,” Jorgenson said.
“There are imbalances that have become more painful and more apparent, and all of that contributes to concerns like that expressed by the IMF,” Jorgenson said in a phone interview.
“But I don’t see that the Chinese are unaware of any of this and they’re trying their best to manage through this somewhat difficult situation,” he said.
“It’s a complicated situation, but nothing warrants the word ‘dangerous,'” said Jorgenson.
When asked whether China faces the risk of a bubble in the property market and a collapse in prices, Jorgenson said it’s still too soon to say.
“A bubble is always a term that’s used retrospectively after the bubble pops. I haven’t seen too much evidence of that yet, but you never know,” he said.
In September, the biggest price hikes for new homes were led by Shenzhen with a year-to-year increase of 34.1 percent, according to NBS data. Prices rose 32.7 percent in Shanghai and 27.8 percent in Beijing, Reuters reported.