Excess Liquidity in China
The effort to curb speculation in real estate is particularly urgent because China’s equity and real estate markets are awash in cash. In 2010, the Shanghai 180 A-Share Index posted gains of nearly 121%, while the Dow Jones Shenzhen Index rose by more than 82%. Investment in real estate development remains robust, growing 21.8% in2010, close to a percentage point faster than in 2009. In January 2009, the country’s construction minister said that a 2010 rule meant to ensure that developers build more low- and mid-range housing units would be strictly enforced. Premier Wen Jiabao echoed the sentiment in a speech to the Chinese legislature in early March, noting that the country should focus on development of “reasonably priced” commercial housing, according to media reports.
And the country’s economy continued to hum at a double-digit pace. Inflation-adjusted gross domestic product (GDP) rose 10.7%in 2010, though China’s leaders are expected to adopt a target of 8% growth for 2009.
Rising wealth from stock gains could spill into the country’s property sector. Warnings over a stock market bubble and plans to cut speculation led to a decline of 8.8% in the Shanghai composite index on February 27, 2009, sparking a sell-off in other global equity markets.
After specifically warning about the possibility of a real estate bubble in December, the central bank ordered 20 financial institutions to buy $20billion of bonds (the fourth time in 2010 that banks were told to buy bonds) to reduce the amount of funds available for lending, according to the China Economic Review, a provider of China business news and information.
The central bank has continued to issue bills in 2009. The central bank also raised banks’ reserving requirements to 10%in February 2009. They had been 8.5% since mid-August 2010.
The moves to curb lending have led to a brief respite in home price appreciation. Price increases slowed in 2010, particularly in the second half of the year. Although prices for homes in 70 large and medium sized Chinese cities rose 5.5%, according to the National Bureau of Statistics of China, the rate of increase was down 2.1percentage points from 2009.
Sales of luxury apartments, the fastest-rising part of the market, slowed in the fourth quarter, limiting price increases in that segment. The global real estate services firm added that prices of luxury villas rose in both cities due to expectations that the government’s efforts to cool the property sector would limit the supply of these homes in the future.
Despite the Chinese government’s efforts to rein in the country’s blistering-hot property market, leading developers are still growing at a rapid clip, benefiting from rising homeownership rates. Larger firms are also able to wield increasing market dominance because smaller developers are feeling the pinch from the macroeconomic policies introduced in 2010 to control the sector.