China property showdown looms

Beijing: China's policy-induced property slowdown has put the central and local governments on a $320 billion (Dh1.17 trillion) collision course in one of the economy's biggest growth-generating sectors.

Beijing wants local governments to bear most of the 2 trillion yuan ( Dh1.1 trillion) cost to construct millions of affordable homes this year. This would offset a slowdown in private real estate investment as developers chop expansion plans following a state drive to curb property speculation.

Softer property prices, prompted by the crackdown, have stopped local authorities from selling land to raise money that's needed to build new homes and service debts they incurred during the central government's last stimulus programme — the 4 trillion yuan plan to combat the global financial crisis in 2008-09.

"As Chinese property prices fall, tensions are rising between cash-strapped local governments that want to pump up the market and a central government determined to preserve social stability by keeping a lid on housing costs," Rosealea Yao, an economist at Beijing consultancy GK Dragonomics, said.

Getting property right is crucial for China nationally as real estate investment makes up about 13 per cent of economic output and the country's vast factory sector is battling with a downturn in external demand from debt-ridden Europe and under-spending US consumers — China's two biggest export markets.

Local governments must find a way to plug a gap in their finances. In 2011, their land sale revenue dropped 13 per cent from the previous year to 1.86 trillion yuan, three domestic property consultancies estimated, and further falls are expected.

The predicament is leading local officials to try to flout property tightening measures and forcing Beijing to hit back hard whenever it sees something running counter to its core campaign to drive down runaway home prices.

Pressure mounts

That explains why the eastern city of Wuhu tried to relax home purchase restrictions on February 7 after its land sale revenue more than halved in 2011, only to suspend the plan four days later as pressure from Beijing and the domestic media rose.

An uneasy compromise could be hammered out if Beijing is prepared to turn a blind eye to some infractions that break the letter — but not the spirit — of calming measures. Such measures have taken nearly two years to gain traction, but now have delivered gently easing property prices four months in a row.

An example of one scenario for a mix of maintaining and easing cooling steps would be for local governments to keep slapping down multiple home purchases by an individual while cutting transaction taxes to revive a comatose market.

A showdown on the issue could come at China's annual parliament meeting in early March, where policies for the year are pinned down and local officials get their once-a-year chance to argue collectively with the top leadership.

Transition year

The stakes are high as 2012 is a year of transition that will prepare for the formal stepping-down of President Hu Jintao and Premier Wen Jiabao. Xi Jinping and Li Keqiang are expected to move into their respective positions in early 2013.

At the local level, property is a major issue. Almost all local governments need land sales revenue to secure bank loans, repay debts, build state-subsidised homes and finance essential infrastructure projects.

In extreme cases, land sale revenue exceeds the total official income of some cities. Typically, the money raised through land sales is equivalent to 30-50 per cent of a city's budget. Land sales have been a crucial way of supplementing official budgets.

Relaxing the campaign against property speculation would boost cities' revenue but be particularly problematic as Wen has made it a personal focus over the past two years.

Reserve ratio may be cut

Further easing in housing and consumer inflation will create more room for bank's required reserve ratio (RRR) cuts if needed to combat a slowdown in economic growth, which slipped to a 2-1/2-year low in the last three months of 2011.

For the current quarter, growth probably will dip below 8 per cent a year, and 2012 may have the weakest full-year expansion in a decade. Even if growth is falling significantly, Wen is likely to stick to his guns.

"We believe the central government will not ease its major property tightening measures in 2012," said Ting Lu, an economist at Bank of America Merrill Lynch in Hong Kong.