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CHINAREPORT I May 2017 1


EDITORIAL


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未标题-1 1 16-9-21 下午10:


I


n recent weeks, as home prices have
continued to surge in China’s major cities,
the government has released a round of mea-
sures to tighten up the market. Following on ear-
lier measures increasing the deposit ratio for buy-
ers of second homes, the authorities announced
that recently divorced people
would no longer qualify for the
first-house discount, unless the
marriage had been over for at
least a year. This was a response
to a rash of “fake divorces,”
where people would split up
just to get around the property
limits.
The new measures may be
able to temporarily stabilise
house prices, but few believe
that they will work in the long run. As a matter of
fact, in the past few years, each round of restrictions
has been followed by a new round of price surges.
For many real estate speculators, action by the gov-
ernment to cool down prices has become a signal
that it’s time to buy, as higher prices will be on the
way in a matter of months.
Rather than resort to measures such as upping
deposits or excluding people from buying houses
in particular locations, which have repeatedly failed
to keep prices down over the last few years, the gov-
ernment needs to tackle the underlying problems
in the real estate market.
Firstly, to address the overheated property mar-
ket, the government needs to control the size of
the money supply, or M2. Economists have long
argued that a fundamental reason behind soaring
property prices has been a loose monetary supply.
The recent price surge in Beijing, for example, took
place immediately after China announced that it
would maintain growth of 12 percent of M2 in
2017, slightly above the 11.5 percent level of 2016.
As property prices in some major cities, including
Beijing, Tianjin and Shanghai increased by over
50 percent in 2016, there is no reason for people
to believe that property prices can stabilise if the

monetary supply stays the same. If the government
is serious about tackling the issue, it should show
strong commitment by lowering the flow of M2.
Secondly, the government should increase the
supply of land to the property market to address
the supply/demand ratio. Under China’s land
policy, the government has a
monopoly over urban land.
As many local governments
depend on the revenue from
selling land to real estate de-
velopers, there is an incen-
tive for local governments to
maximise their revenues by
controlling the supply of land.
Thirdly, the government
needs to continue to improve
the business environment.
One reason that the real estate industry is so attrac-
tive compared to other industries is that there’s a
dire lack of alternative investment channels in Chi-
na. As the most lucrative industries are controlled
by China’s powerful state-owned enterprises, the
sectors open to private capital are universally less
attractive than the real estate market.
The government must realise that soaring prop-
erty prices and the lack of alternative investment
channels have formed a vicious circle. As property
prices continue to rise, it enforces the now preva-
lent idea that investing in the real estate sector
yields far more profits than in other sectors.
The result is that capital and investment prefer
the real estate industry far more than other sectors
that are preferred by the government. That causes
a lack of capital and financial support for the real
economy in these sectors, to which the government
then responds by further increasing monetary sup-
ply in the hope of injecting more capital into these
sectors. This in turn has led to further investment
in the real estate sector and higher property prices.
The government must show the political will to
break the vicious circle, as it poses a great threat
both to China’s political stability and its economic
future.

Political will is needed to tackle soaring house prices


The government must
realise that soaring
property prices and
the lack of alternative
investment channels have
formed a vicious circle