China's property market and the global economy

China's continuing high rate of economic growth is driving many economies around the world struggling to recover from the effects of global economic financial crisis.

Driven by the US$586B stimulus package, reckless bank lending and imbalanced development, China's state dominated property boom is a major contributor to economic growth.

It also has parallels to the US sub-prime crisis involving reckless mortgage lending, bundling and sale of hi-risk mortgages to investors, and blinkered government oversight, suggesting economic and political pain for China in 2011.

Problems facing Beijing

The boom presents Beijing with multiple challenges comprising a major surplus of overpriced vacant housing, a shortage of affordable housing, square kilometres of overpriced, vacant, and underperforming commercial property investment.

The combined negative effect of these surpluses is compounded by attempts to slow inflation, a slowing property market with high levels of local and central government real estate related debt, plus rising state bank NPL risk that will have a severe effect on local and national GDP growth into 2011 and 2012.

Beijing desperately needs effective policies and new development options capable of maintaining both local and national GDP growth as well as ongoing foreign investment.

Government strategies

Beijing policies to stabilize housing prices include -

• raising lending interest rates
•  increasing deposits on 2^nd and 3^rd new homes
• limiting sales of new homes to one per buyer
• cooling property prices
• keeping the yuan low
• restricting inflation to "reasonable levels"

Beijing has also made clear its intention to "crack down" on -

• profiteering
• bank lending breaches
• underdeveloped land hoarding
• delaying sales for bigger profits

While government rhetoric may sound impressive, developing and implementing the complex mix of effective policies of inflation and currency control, as well as property speculation and demand for affordable house prices, may exceed the capacity of the CCP.

Implementing policy

Beijing proposes repossessing land owned by developers but not developed within the required time frame from date of purchase, for construction of new housing to meet demand.