A housing bubble threatens China

CNBC COMMENT

WITH Beijing’s notoriously cold winter behind us, those living in the Chinese capital are looking forward to warm weather and perhaps a wind of change in the second quarter.

Now that the country has new leaders, everyone is watching to see if President Xi Jinping and his administration will start pushing through much-needed economic reforms. Many in the public are hopeful that Xi will make good on his pledges to set the country on a new path and help over 1.3bn achieve what he described as the China dream. Investors are waiting for signs the government will take serious steps to put more money in the pockets of its people and improve access to China’s vast consumer market.

Also this quarter, people are closely tracking inflation. After the higher prices announced due to the normally volatile Lunar New Year holiday period, economists and citizens alike are waiting to see how prices on the store shelves will fare this spring. At a wet market in the city of Nanjing, people complained to us about higher prices for popular vegetables such as eggplants and spinach. Inflation in China is still within a comfortable range for the government, but any upward pressure unnerves the nation’s policymakers, who are concerned about any possible social unrest. Authorities at the People’s Bank of China have already indicated that the central bank would remain vigilant to keep prices from getting out of hand.

Finally, property will be in greater focus in the coming months. The government has announced several measures to clamp down on the sector in the hopes of preventing a housing bubble. The most talked about curb is the 20 per cent capital gains tax on second homes. Already people are finding ways around it, like getting divorces to continue owning homes while avoiding the tax. In a research report, Wei Yao of SG Global Economics said that “housing sales data are undoubtedly the best performing among China’s activity statistics at the moment but, hand in hand with that, house prices are too strong. This looks almost like an embarrassment to the central government, which has made housing affordability its top priority.”

Over the weekend, officials detailed even stricter property controls in an attempt to rein in the housing market. However, in China’s constrained financial system, ordinary citizens have few options to invest their money. Until the government reforms the financial system, these curbs may have little effect – another reason people are hopeful the authorities will pave the way for more investment tools.

Eunice Yoon is a senior correspondent at CNBC.

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