The prospect of a destabilising bubble in the property sector appears to have receded in the first half of the year, according to official statistics. Softening prices and tighter regulations have both played a part.
Figures from China’s National Bureau of Statistics suggest that a nascent bubble in the country’s property sector may have begun to lose momentum in the first half of 2002. Growth in fixed-asset investment appeared to rise sharply during the months of March and April, only to slow just as quickly in succeeding months. Since the Chinese property market is increasingly driven by market forces, this may indicate that over-investment is being scaled back as prices soften – a tendency not always seen in other sectors, particularly state-directed infrastructure development.
Investment spending of all kinds began to accelerate rapidly at the beginning of this year, fuelled partly by a Yn150bn bond issue in autumn 2001, the proceeds of which began to be disbursed only in subsequent quarters. In the January-February period (statistics for the two months are normally combined to accommodate the shifting date of Lunar New Year), fixed-asset investment rose 24.5 per cent over the same period a year earlier, the highest year-on-year increase since early 1999.
Increase in property spending
It appears, however, that the rise in state-led investment was accompanied by a far more dramatic increase in spending on property development, which is more heavily influenced by private-sector decisions (although mortgage loans and credit to developers still come largely from China’s state-owned banks). Property investment rose by more than 30 per cent year-on-year in the first two months of 2002, exceeding the growth rate of non-property fixed-asset investment by nearly 8 percentage points. The incipient property boom gathered pace in March and April, with year-on-year growth of more than 40 per cent recorded in each month.
There is evidence, however, that property development in the first quarter ran well ahead of growth in demand, in spite of the continued strength of consumer spending in China’s coastal cities. A study conducted by the National Bureau of Statistics found in April that the average selling price of ‘commercial housing’ – that is, housing stock not owned by state work units and transferred to employees below cost – had fallen by 0.9 per cent from the same period in 2001. On April 23, China’s vice-minister of construction, Liu Zhifeng, revealed plans for a crackdown on fraudulent practices in the property development sector. Liu also announced the dispatch of housing inspectors to 35 major cities to investigate alleged malpractice among property developers, as well as plans to draft new regulations dealing with the sector.
Although Liu’s comments dealt primarily with outright fraud, such as the sale of nonexistent properties, and with shortcomings in the property management business, it appears that Beijing may also have been concerned about the possibility of a property glut similar to the ones that affected certain parts of the country (Shanghai, Beihai, Hainan island) in the early 1990s.
Speculative investment in the property sector poses greater risks to financial stability than the state’s current policy of borrowing to finance infrastructure projects. Although construction activity boosts employment and consumer demand in the short run, property development that outpaces demand also worsens China’s persistent deflation problem by driving down prices in the sector.
Premier Zhu Rongji, whose policies have helped to deflate previous bubbles in the sec- tor, may have expected that tighter supervision through the construction ministry would help slow the growth of supply. If so, the strategy seems to be working.
Year-on-year growth in property investment fell substantially after vice-minister Liu’s speech, falling from 43 per cent in April to 32 per cent in May, and to 23 per cent in June. The June figure, in fact, was only slightly higher than the year-on-year growth rate of non-property-related fixedasset investment, which has held remarkably steady from month to month during the first half of 2002. Fluctuations in the property market, in other words, have driven nearly all the month-to-month instability in China’s overall investment growth during this period – and for the moment, at least, Beijing’s policy bias seems to be towards greater restraint.
Overcapacity in transport
The National Bureau of Statistics has indicated, however, that ‘bubble’ investment may be a growing concern in sectors other than property. A recent report by the bureau suggested that the problem might be particularly serious in transportation infrastructure, one of the sectors targeted by Beijing’s fiscal stimulus policy. Over-capacity in air transport has been an issue since the early 1990s, but according to the South China Morning Post, the problem has spread to other transport facilities – such as logistics centres, where capacity utilisation has fallen to just 40 per cent nationwide.
Ironically, it appears that the state can deflate asset bubbles driven by private-sector investors more easily than it can restrain over-investment by its own local officials.
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