You bao you ya, roughly translated into ‘maintain and control', is the latest catchphrase of the Chinese government for, what is essentially, the uncontrollable real estate sector.

At the annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference in Beijing last week, delegates remained under siege over spiralling property prices and unaffordable housing. And perhaps for the first time, the Chinese media has been sharply critical of Beijing's meddling with the real estate sector.

For some months now, analysts, foreign and domestic, have been screaming hoarse about property bubbles and here's why: Real estate investment in China more than doubled to $156.2 billion (Dh573 billion) last year. In Tier-I cities like Shanghai, mortgages rose 1,600 per cent in 2009 from 2008, while residential property prices in the city shot up 68 per cent to a phenomenal $4,571 per square metre.

Public anger

Faced with rising public anger and a frothy market, policy makers have been pushed on to a tightrope. Their immediate concern is to cool property prices by initiating much stricter rules on mortgage loans, taxes and financing for listed companies. Earlier efforts to stabilise the market simply decreased the volume of sales and not house prices.

China's watchdogs on banks, securities and land resources are likely to act together to rein in the wild horses. The China Banking Regulatory Commission will not only limit mortgage loans for second-time homebuyers, but also raise both the down payment and the interest rate for third-time homebuyers. There will be new rules on financing for listed companies and stricter standards for controlling property developers' financing.

Commercial banks will also control lending for property development. Projects that set land aside for more than two years would not be able to get loans from banks. Scrutiny of loans to real estate companies will be much stricter in 2010. Regulators are also set to raise the qualification requirements for property developers.

Regulatory straitjacket

Faced with such regulatory straitjacket, property stocks remained edgy throughout the week. Developers lost value with Poly Real Estate plunging 2.4 per cent and China Vanke declining 2 per cent on the Shanghai index.

Property shares have been among the worst performers this year, declining by 3.6 per cent on constant fears of liquidity curbs.

Premier Wen Jiabao's call for affordable housing has also caused a lot of alarm. The government has promised to increase the supply of affordable houses and punish developers who hoard land and houses. It will subsidise 63.2 billion yuan (Dh33.94 billion) to build 3 million cheap houses and rebuild 280 million houses in 2010.

In the blink of an eye, the real estate sector in China has gone from a blue-eyed boy to the country's whipping boy. The housing market this time last year was contracting alarmingly and it took a 4-trillion-yuan stimulus package and a host of other measures to resuscitate it.

Gigantic trap

By the middle of 2009, homebuyers started putting down-payments on houses again. With more buyers in the market, average prices nationwide grew 24 per cent in 2009. But now, a booming real estate, which buffered the country from the financial downturn, has grown into a gigantic economic trap.

In China, real estate is made more complicated by the fact that local governments rely heavily on commercial housing and land sales as their biggest source of revenue. According to reports, proceeds from sale of land and housing units form 40 per cent to 60 per cent of a city government's revenue. In this knotty scheme of things, directing local governments to provide cheap housing would be suicidal in revenue terms. Right now, Beijing desperately needs to regulate its city governments earning huge profits from real estate, without trampling upon it altogether.

Analysts say the government is aware that measures to control property price growth nationwide could hurt more than help. The property sector is a major pillar of the Chinese economy, driving demand for everything from cement to home furnishings and automobiles. A sharp correction in the real estate market couldn't be in anyone's interest right now.

 

The columnist is a writer based in China.