[photopress:southsea_bubble.jpg,full,alignright]There is something extremely elegant about the way the government in China has been fine tuning the financial situation to make sure that a property bubble does not destabilize a booming economy. Plainly the Chinese government does not want a repeat of what happened in Japan or, going much further back, a repeat of the South Sea Bubble, illustrated here. A good way to see what the government has been doing is to look at it in calendar fashion.
The government initially focused on curbing land supply in mid-2003, but this only pushed up prices. So it then switched the focus to cooling demand.
April 14, 2003 – China’s bank regulator starts reviewing loans to sectors such as steel, cement, property and autos.
April 29-30, 2003 – The government punishes party and bank officials for letting an iron-and-steel firm get away with illegally obtaining land and bank loans.
June 13, 2003 – Central bank announces curbs on loans to developers and buyers of luxury homes after months of official warnings that a high-end housing frenzy could inflate a bubble similar to one that burst in the 1990s
Aug 1, 2003 – Government puts brakes on approving establishment and expansion of industrial development zones.
September 3, 2003 – China’s bank regulator issues rules under which property developers must put 35% of their own capital in a new project before getting bank loans. For home buyers, a mortgage cannot exceed 80% of the housing price and a borrower’s total expenditure on housing must be kept below half his income
Oct 28, 2004 – The central bank raises its benchmark interest rates for the first time in nine years, by 0.27 percentage point.
[photopress:china_bank_1.jpg,full,alignright]March 16, 2005 – China allows banks to raise mortgage rates and to increase down payments to 30% from 20%. Rates on a typical five-year mortgage rise to at least 5.51% from 5.31%.
April 27, 2005 – The central bank raises commercial bank lending rates for the first time in 18 months. The one-year rate rises to 5.85% from 5.58%.
April 28, 2005 – The cabinet targets speculative demand with measures including higher taxes and tighter checks on bank loans.
May 12, 2005 – China’s cabinet issues a circular telling local governments to give incentives to developers of smaller, cheaper homes.
June 1, 2005 – The government launches a nationwide capital gains tax of 5.5% on houses sold within two years.
May 17, 2005 – China’s cabinet calls for changes in credit policy and other measures to cool down real estate market.
May 29, 2005 – China’s cabinet says houses sold within five years of purchase will be subject to a business tax — levied at 5% — payable on the total sale price. The same amount will be taxed on the capital gains of luxury housing even after five years has elapsed.
China will fine developers who do not begin construction within a year of the start date in their contract. Those that do not begin to build within two years will lose land-use rights.
June 16, 2005 – Central bank raises bank reserve requirements.
July 24, 2005 – Central bank raises bank reserve requirements.
July 24, 2005 – China’s cabinet approves rules restricting purchases of property by foreigners, reflecting concerns that overseas buyers are driving prices to excessive levels.
July 27, 2005 – China says it will start imposing a tax on second-hand property sales on Aug 1, implementing a directive issued two months earlier.
Sept 5, 2006 – China issues detailed rules on the foreign exchange aspects of foreigners’ purchasers of property.
Nov 20, 2006 – China’s finance ministry says it will double land-use fees for new construction projects from January 1 in a bid to curb fixed-asset investment growth.
Jan 5, 2007 – Central bank raises bank reserve requirements.
Jan 17, 2007 – The national tax administration says it will start taxing the appreciation of property values based on actual market prices. Chinese developers say later that their earnings will be little affected by enforcement of a land appreciation tax that authorities had largely ignored for years.
Jan 23, 2007 – The construction ministry says it will increase taxes to discourage sales of big homes.
Feb 16, 2007 – Central bank raises bank reserve requirements.
March 23, 3007 – The construction ministry says it will check whether local governments are implementing measures aimed at cooling the market and errant officials will be held accountable.
April 5, 2007 – Central bank raises bank reserve requirements.
April 29, 2007 – Central bank raises bank reserve requirements.
May 18, 2007 – China’s central bank says it will raise both interest rates and bank reserve requirements.
June 11, 2007 – China’s commerce ministry issues new rules making it harder for foreigners to invest in property. Existing foreign-funded firms also need to seek additional approvals to launch new development schemes
June 18, 2007 – China’s banking regulator says it has punished the branches of eight banks for extending loans that were illicitly used for property and stock market investments.
Looked at in that way it can be seen the government has certainly been monitoring the real estate bubble. Instead of one massive correction that might have affected the whole economy it has been nibbling away continuously with a series of measures to try and take the heat off. The fact that some banks and many developers spent much time and effort trying to get around this is beside the point. The government has been aware of the problem and has continuously been trying to correct it.