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How to solve China’s property bubble

Mainland Chinese who fancy a flutter but not a trip to Macau have an easy alternative: China’s stock markets, which for years have been compared to casinos, where bets on stocks are based on sentiment and rumour, rather than economic fundamentals.

Such behaviour has caused wild fluctuations over the years as bubbles form and burst, punctuated occasionally by government intervention – usually featuring misguided policies and ill-considered rescue plans to the tune of trillions of yuan of taxpayers’ money.

Last year, the central government reportedly injected nearly 2 trillion yuan (HK$2.32 trillion) in a desperate bid to prop up the markets, but failed. The spectacular crash that ensued spooked international markets and heightened fears over the health of the Chinese economy.

Since the crash mainlanders have turned to what they believe is a safer bet – the property markets. They have done so on the assumption, right or wrong, that the mainland leadership wouldn’t dare allow property prices to crash because a precipitous fall could send the whole economy down the drain.

A bubble has formed rapidly since massive amounts of speculative funds have piled into residential property, helped by ample liquidity and the tacit encouragement of local authorities strapped by weak finances.

Last month, China’s home price growth climbed to its highest level since a key index tracking the market began in January 2011, and mortgage loans by individuals accounted for 55 per cent of total new bank lending.

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According to estimates by Renmin University, mortgage loans in the first half of this year amounted to at least 2.3 trillion yuan, almost a third of total new banking lending and almost equal to the total mortgage lending of 2015. Adding the 1.1 trillion yuan lent to property developers, lending to the property markets accounted for at least 46 per cent of total new bank lending.

Frenetic buying, which first started in the top-tier cities of Beijing, Shanghai, and Shenzhen, is now spreading to second- and third-tier cities such as Hangzhou ( 杭州 ), Suzhou ( 蘇州 ), Nanjing ( 南京 ), and Chengdu (成都).

It has gone from crazy to ridiculous when couples in Shanghai reportedly divorce to skirt the purchasing restriction of one property for one married couple.

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This month, a respected economist who works for the People’s Bank of China joined a chorus of commentators urging immediate measures to address the property bubble by clamping down on excessive financing.

So far, the central government has shown no sign of heeding the call. Many economists suspect the mainland leadership is reluctant to step in as surging property sales have given a much-needed short-term boost to economic growth at a time when manufacturing is sluggish and private investment is weak.

It has basically given local authorities a free hand in tackling overheating property prices, but local officials have no intention of cooling them down, not least because local governments have long relied on land sales as a key source of revenue.

This has led to a strange phenomenon in which local authorities announce half-hearted restrictions on home purchasing, while at the same time refusing to release more land. This helps them to pursue record prices on every new land sale, further heating the frenetic sentiment.

Tightening measures having little effect on surging property prices

The good days will not last if the painful experiences of other countries are anything to go by. As the government has blindly allowed property prices to rise significantly, it has also raised the danger of a significant correction, which could have serious political, economic and social implications.

It is time the central government took a holistic approach to regulate the property market by curbing excessive financing and introducing the long overdue property tax. Doing so would stabilise the market and boost the finances of local governments.

Commercial banks are supposedly under strict instructions to differentiate between first time buyers and those on second or third home purchases who should face much higher down payments. But in reality, many commercial banks work with property developers to provide as much as 90 per cent of the mortgage lending for any home buyer.

The mainland leadership started to toy with a property tax by introducing a pilot scheme in Chongqing ( 重慶 ) and Shanghai in 2011 but the experiment remains small scale.

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Finance Minister Lou Jiwei ( 樓繼偉 ) said recently that while the task was hard, China would go to great lengths to introduce the property tax.

The key stumbling block is that authorities have so far failed to set up a national database for real estate registrations and transactions – partly due to strong resistance from vested interest groups including corrupt officials. A national database would show up the huge amount of illicit money laundered through property transactions and ownership.

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper