BEIJING: Reluctant to raise interest rates, China is instead tightening its grip on the property market, a stop-gap strategy that will dampen inflation but fail to cure the root problem of too much cash in the economy, according to a Reuters report on Friday, Jan 28..
Beijing unveiled a series of new rules this week, including a long-awaited home ownership tax, to deter real estate speculation, its third package of measures in the past year to rein in housing prices.
The vigour with which the government has implemented and refined its property clampdown contrasts with the torpor of its monetary tightening -- just two interest rate increases since October, even though inflation has put real deposit rates about 2 percentage points into negative territory.
There is a logic to Beijing's approach.
As recent comments by central bank officials indicate, the government fears that aggressive interest rate increases would inflict undue harm on the economy at a time when external demand remains shaky. Steps to cool the property market help fill in for that missing tightening.
"If China does not hike rates, it must find a way to cap asset prices to avoid asset bubbles," said Ting Lu, an economist with Bank of America-Merrill Lynch. "Part of inflation expectations is from rising property prices, so controlling home prices could help dent inflation expectations."
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Chinese property prices rose an annual average of 10 percent last year, outpacing the 3.3 percent increase averaged by consumer prices. A rebound in month-on-month property inflation since September also helped drive a spike in broader inflation to its fastest in more than two years.
The latest property tightening campaign is a hodge-podge: a home ownership tax on a trial basis in two cities; a stricter housing sales tax; incrementally higher mandatory downpayments on second homes; and rules to prevent individuals from owning more than two homes in most major cities.
Of 10 China-based analysts polled by Reuters on Friday, six said the measures would restrict property price rises to less than 5 percent this year, while three forecast outright declines.
''
NOT ENOUGH
Yet property tightening by itself is only a band-aid solution, alleviating the symptoms of excessive liquidity in the economy, not actually draining the vast pool of cash.
"The property measures are quite tough. The market should react at least in the near term, but fundamentally it should not be a substitute for monetary measures," said Kevin Lai, an economist with Daiwa Capital Markets.
Lai predicted two interest rate increases this year, in line with the market consensus, saying these were needed to steer broad money growth, running at an annual pace of 20 percent, back to a normal level, which is about 16 percent for China.
But he also sympathised with Beijing's wariness to move more forcefully. To keep the yuan stable, the central bank already has its hands full buying up most of the foreign exchange streaming into China through the current account.
If Chinese interest rates were significantly higher than in developed markets, it would have more capital inflows and a bigger liquidity headache to deal with, Lai noted.
Yi Gang, deputy governor of the People's Bank of China, noted that dilemma in an official magazine interview earlier this month and arrived at the conclusion that the role of monetary policy was becoming more limited.
''
IMPACT OF TIGHTENING
Ironically, if the government is successful in taming property inflation, it will help deflect the capital inflows now handcuffing its monetary policy and so gain more room for conventional tightening.
"Our research shows that the rise in asset prices is the most important factor attracting overseas money inflows," said Tang Jianwei, economist at Bank of Communications in Shanghai.
The question, then, is just how successful the property clampdown will be.
Analysts say the new home ownership tax, launched by the cities of Shanghai and Chongqing, is too small and loophole-prone to be significant at first, but that it is nevertheless a step in the right direction.
More important -- even "draconian", in the estimation of research firm CEBM -- are the steps to prevent people from owning more than two homes and the stricter implementation of a 5.5 percent sales tax.
"The measures will help squeeze out some speculators," said Gong Ping, a senior manager at Centaline, a real estate agency in Beijing.
But Chen Dong, a property analyst at Bank of China International in Shanghai, warned that as a band-aid solution to inflation, the stickiness of the latest property tightening measures would wear off before long.
"No doubt, the most effective measure to curb inflation is to raise interest rates," he said. - Reuters
Beijing unveiled a series of new rules this week, including a long-awaited home ownership tax, to deter real estate speculation, its third package of measures in the past year to rein in housing prices.
The vigour with which the government has implemented and refined its property clampdown contrasts with the torpor of its monetary tightening -- just two interest rate increases since October, even though inflation has put real deposit rates about 2 percentage points into negative territory.
There is a logic to Beijing's approach.
As recent comments by central bank officials indicate, the government fears that aggressive interest rate increases would inflict undue harm on the economy at a time when external demand remains shaky. Steps to cool the property market help fill in for that missing tightening.
"If China does not hike rates, it must find a way to cap asset prices to avoid asset bubbles," said Ting Lu, an economist with Bank of America-Merrill Lynch. "Part of inflation expectations is from rising property prices, so controlling home prices could help dent inflation expectations."
''
Chinese property prices rose an annual average of 10 percent last year, outpacing the 3.3 percent increase averaged by consumer prices. A rebound in month-on-month property inflation since September also helped drive a spike in broader inflation to its fastest in more than two years.
The latest property tightening campaign is a hodge-podge: a home ownership tax on a trial basis in two cities; a stricter housing sales tax; incrementally higher mandatory downpayments on second homes; and rules to prevent individuals from owning more than two homes in most major cities.
Of 10 China-based analysts polled by Reuters on Friday, six said the measures would restrict property price rises to less than 5 percent this year, while three forecast outright declines.
''
NOT ENOUGH
Yet property tightening by itself is only a band-aid solution, alleviating the symptoms of excessive liquidity in the economy, not actually draining the vast pool of cash.
"The property measures are quite tough. The market should react at least in the near term, but fundamentally it should not be a substitute for monetary measures," said Kevin Lai, an economist with Daiwa Capital Markets.
Lai predicted two interest rate increases this year, in line with the market consensus, saying these were needed to steer broad money growth, running at an annual pace of 20 percent, back to a normal level, which is about 16 percent for China.
But he also sympathised with Beijing's wariness to move more forcefully. To keep the yuan stable, the central bank already has its hands full buying up most of the foreign exchange streaming into China through the current account.
If Chinese interest rates were significantly higher than in developed markets, it would have more capital inflows and a bigger liquidity headache to deal with, Lai noted.
Yi Gang, deputy governor of the People's Bank of China, noted that dilemma in an official magazine interview earlier this month and arrived at the conclusion that the role of monetary policy was becoming more limited.
''
IMPACT OF TIGHTENING
Ironically, if the government is successful in taming property inflation, it will help deflect the capital inflows now handcuffing its monetary policy and so gain more room for conventional tightening.
"Our research shows that the rise in asset prices is the most important factor attracting overseas money inflows," said Tang Jianwei, economist at Bank of Communications in Shanghai.
The question, then, is just how successful the property clampdown will be.
Analysts say the new home ownership tax, launched by the cities of Shanghai and Chongqing, is too small and loophole-prone to be significant at first, but that it is nevertheless a step in the right direction.
More important -- even "draconian", in the estimation of research firm CEBM -- are the steps to prevent people from owning more than two homes and the stricter implementation of a 5.5 percent sales tax.
"The measures will help squeeze out some speculators," said Gong Ping, a senior manager at Centaline, a real estate agency in Beijing.
But Chen Dong, a property analyst at Bank of China International in Shanghai, warned that as a band-aid solution to inflation, the stickiness of the latest property tightening measures would wear off before long.
"No doubt, the most effective measure to curb inflation is to raise interest rates," he said. - Reuters
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