The editor-in-chief of the National Business Daily's op-ed pages, Ye Tan, argues in a critical essay that by abandoning market-orientated controls in favor of legislation, the government’s recent efforts to cool the property sector are doomed to fail. Worse, they put China's entire financial sector at risk
A mismatch between the needs of the property market and the macro-economic controls favored by policymakers has led to an ongoing flurry of rumors and uncertainty in the sector. While seven to eight months are needed to observe the impact of new regulations on market trends, property prices are unlikely to go down as a result of recent regulatory efforts, writes Ye Tan.
Rumors about the likely direction of China’s real estate sector saturate both the media and business circles, creating obstacles to the smooth and sustainable flow of information and casting doubt into the minds of regulators as they look to the next round of macro-economic controls. This in turn leads to fresh rumors.
The past week has been a week of clarification, with three regulators clarifying rumors concerning the property market.
First, central bank deputy governor Wu Xiaoling said on October 19 that the bank still had not received supplementary details from the government for the new mortgage policy relating to second properties. Ma Fangming, a spokesperson at the State Administration of Taxation (SAT), said there was still no timeframe for levying a new property tax and added that recent media reports about the new tax were not accurate. Finally, the China Securities Regulatory Commission (CSRC) said that, despite market rumors, it had not temporarily suspended approvals of submissions by Chinese property firms to go public. The CSRC’s press office added that media reports on the subject had been seriously inaccurate and irresponsible.
These clarifications, however, are not likely to effect ongoing property market trends. Because details of the various policies have still not been confirmed, it is certain that the participants in the sector will have differing interpretations of the new regulations. And while current market rumors and the subsequent clarifications will affect buyer psychology, which in turn will alter liquidity in the market, which has happened before, this is unlikely to be sufficient to alter the current trends.
Media reports do not appear out of the blue. In the six weeks following the announcement of the new second home mortgage policy, a number of banks expressed concerns over ambiguities in the new rules. This is an untenable situation; ambiguities, such as the definition of what constitutes a second mortgage and how banks should manage the mortgages, need to be clarified to avoid the policy becoming a chess game between the government and the banks.
Adding to the difficulties, mortgages are central to the business models of most banks, accounting for more than half of the overall business volume of many small commercial banks. Constraints on issuing mortgages could force some commercial banks to seek additional profit streams, which is already regulated against in many cases, or expand financing channels to stock market investors, which is undesirable for China’s macroeconomic stability. Thus, the central bank must tread a fine line as it tries to regulate the property market while ensuring commercial banks can survive.
Why can’t the government announce clearer and more market-oriented macroeconomic controls that balance the needs of the market and the regulator and thus avoid this dilemma? If the government wishes to curb liquidity by regulating asset prices, the best approach is to launch property taxes to reduce investment returns, or else provide more diverse investment channels that can generate equally high investment returns. To ignore these mechanisms, which can curb liquidity at its roots, to instead block financing channels leads only to a reshuffle in the real estate market in terms of the relationship between property firms and buyers.
Property taxes should instead be approved by the People’s Council, followed by a lifting of conflicting taxes. The additional tax take can then be invested into affordable housing. By using a property tax, the government can better control the financial and market forces that are currently limiting the government’s ability to influence public finance, information flows and tax cost and preventing it from providing a more equal distribution of public wealth. With the government’s focus on providing affordable housing for the majority of the population, a property tax can help it secure sufficient capital for its construction.
Developing more diverse investment channels for domestic and overseas capital, such as through expanding the private equity, securities and fund markets, can also help cool the property market in a market-oriented and sustainable way.
Although administrative measures can slow the public listing of property firms by blocking real estate financing channels, liquidity is unlikely to disappear in a market full of positive expectations. In addition, property firms can turn to international capital for financing. The Hong Kong Stock Exchange and foreign-funded banks are willing to step in and replace domestic commercial banks in financing Chinese developers and buyers. Unless the government can stop property firms from listing overseas, or prevent them from accessing property funds, this measure is unlikely to have the impact on the market the government initially intended.
I personally do not think China’s property market is likely to cool following the government’s efforts. Although the housing supply has been reduced, high prices and demand remain; raising the cost of second property purchases is likely to mean only that banks will make higher returns on mortgages. But even if the property market can be cooled, a lack of alternative investment channels will mean investors will shift their attention to the stock market, which will in turn create more pressure on the nation’s already overheated bourses.
This article first appeared in Chinese in the National Business Daily on October 23, 2007. This is a faithful translation and The China Perspective takes no responsibility for the accuracy of the original article.