SINGAPORE, March 21 (UPI) -- By announcing measures last week to tighten mortgage lending, China finally appears to have made up its mind in defusing the long-building property bubble. But if the property market has been highlighted by many economists as the top risk for the Chinese economy this year, the latest measures are so mild they are unlikely to prick the bubble.
More likely, they are the first of a series of measures to address the property imbalances.
In recent weeks, the People's Bank of China has made a series of policy fine-tuning measures including lowering interest rates on excess reserves and raising the minimum down payment for mortgage loans from 20 percent to 30 percent in selecting cities with fast growth in an effort to cool property market speculation (though it left it up to the bank to decide in the different cities and said it would not have universal policy for the whole country).
The central bank also announced it was scrapping the preferential mortgage rate. Banks had been offering a preferential mortgage rate of 5.31 percent but all mortgage lending will now be treated as normal lending and have a minimum lending rate set at 90 percent of the official rate according to its maturity. For instance, the official lending rate of loans with maturities of five to 10 years is 6.12 percent. The minimum lending rate of mortgages within these maturities will be 5.51 percent, which would be 20 basis points above the preferential mortgage rate.
The central bank's move followed a decision by the Shanghai municipal government to impose a 5 percent capital gain tax on people selling property units after less than 12 months of ownership.
But the moves are likely to be a case of too little too late.
"The measures may be effective for a month or so. However, I do not think they are sufficient to put an end to speculation," said Andy Xie, senior economist at Morgan Stanley.
Both Premier Wen Jiabao and central bank Governor Zhou Xiaochuan highlighted the importance of curbing excessive rises in property prices as key to this year's austerity program during the just-concluded National People's Congress.
Property prices have risen on average 14.4 percent last year, far above any of the other categories in the CPI basket. The number of total outstanding mortgage loans from commercial banks is estimated to have reached the equivalent to 23 percent of banks' long-term loans.
"The measures seem more like a warning shot rather than an attempt to correct property prices, as most mortgage borrowers can only get 70 percent of mortgage finance and the average leverage of mortgage borrowing is 30-40 percent. Liquidity remains ample and local interest rates are near zero or slightly below in real terms," notes Dong Tao, chief economist for Asia at CSFB in a research note.
Though the measures are unlikely to burst the bubble, Dong warned that this is likely to be "the beginning of a series of policies targeted at the property sector, which could eventually cause a price correction."
Eddie Wong, chief Asian strategist at ABN AMRO agreed saying that the tightening in mortgage lending was clearly designed to cool the overheating real estate sector, but the measures were "too mild."
"The increase in mortgage rate is simply too mild to cool the bubble, in our opinion. Also, the central bank has left it for the banks to decide in which cities property prices are rising excessively. If banks want to do more mortgage business, they still have the discretion to put fewer cities in this category," Wong pointed.
Such mild measures may reflect the fact that there is still political resistance to the cooling measures.
Some point to the vested interest in relation to the property sector, with a small minority creating a means through the property market of redistributing wealth to themselves.
"While strong property demand appears to be the cause of the price
increases, demand is mainly inventory demand for price speculation.
When the dust settles, China would face massive oversupply," Xie pointed.
Xie believes a capital gains tax of 50 percent or more for transactions within one year of ownership and 10 percentage points less for every additional year could stop speculation.
Central bank officials have warned that the surging property prices might have hidden financial risks, as excessive increases in property prices could lead to non-performing loans, if the market makes a correction later.
Dong pointed that the central bank's move was significant as it marks a "turning point in the government's policy towards surging property prices."
"This is the first policy launched against property speculation since the austerity program and land sales restrictions last April. Policy is shifting from nationwide campaign to targeting specific cities, and the central government has finally managed to bring the local government aboard to take joint actions," he said, pointing to Shanghai's tax initiative on speculative property transactions.
Because Chinese asset markets are very sensitive to political signals in the short term, the property market is likely to cool, economists agreed. but more will be needed to burst the bubble.
Indeed, over the weekend, Deputy Minister of Finance Xiao Jie suggested that the government is set to launch property taxes in the near future.
