China pricks property bubble

China’s economy has shown signs of slowing a little this year – GDP growth eased from 11.9% to 10.3% in the second quarter, then again to 9.6% in the third quarter. Yet property prices are still rising apace, climbing by an average 9.1% year-on-year across the nation in September. The increase has been fuelled by the combination of a high savings rate and a lack of other investment opportunities. High prices are even starting to change the traditional Chinese preference for sons, says Patti Waldmeir in the Financial Times. Chinese families are expected to buy a flat or home for a son before he can marry – with prices rocketing, less well-off parents simply can’t afford to do so.

China’s government is well aware of the dangers posed by a property bubble – Beijing has been doing its best to take the heat out of the market. Last month, the government raised interest rates for the first time in nearly three years. Higher deposit requirements and restrictions on third-home purchases have already been put in place. And the finance ministry is thought to be preparing a property tax scheme centring on Shanghai and Chongqing.

Its attempts may be working. Indeed, financial analyst Andy Xie wrote on Caixin Online last month that “China’s property bubble has peaked” amid tighter monetary policies and government controls on property speculation. He believes that while prices in some smaller cities might keep climbing, “prices in Tier 1 cities are unlikely to reclaim the heights seen late last year in places such as Shanghai”. Chinese property now faces “a mild bear market… [which] may last five years”. Xie reckons that the market will suffer a slow leak rather than an explosive deflation, which “will have less of an effect on China’s economy than many expected”.

The only trouble is, attempts to control China’s property market may result in bubbles forming elsewhere. Restrictions on the Shenzhen market, for example, have resulted in buyers flocking to neighbouring Hong Kong, reports Bloomberg. Hong Kong has seen prices surge by 50% since early 2009. As Eddie Hui, real estate professor at Hong Kong Polytechnic University, puts it: “There’s a strong belief among mainland Chinese that investing in property is the best way to preserve capital value.” Credit Suisse analysts Cusson Leung and Joyce Kwock reckon Hong Kong residential prices will gain another 30% by the end of 2011.

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