Page 1 of
2 Another chill for China's
property sector By Kent Ewing
HONG KONG - To prevent a possible economic
recession caused by a bubble-burst in the property
market - as happened in Japan in the 1990s - the
Chinese government has taken more tough measures
to cool down the sector.
China will resume
collection of a value-added tax (VAT) on land,
which has been suspended for more than a decade,
from property developers, the State Administration
of Taxation said on its website on Tuesday.
Formally effective from February 1,
property developers will have
to pay
30-60% of their net gains as VAT on land. The
administration said the tax will be collected as
soon as a single development project is finished
or transferred.
On Thursday morning, share
prices of mainland property developers continued
to drop significantly on the Shanghai, Shenzhen
and Hong Kong stock exchanges.
China
enacted a regulation to levy the VAT on land in
1993, but it was not widely collected because of a
subsequent recession in the real-estate sector. At
present, some regions in China are collecting the
tax at a rate of 1-2% of advance sales of newly
developed houses, while other areas have yet to
start collection.
Shenzhen is the only
Chinese city that resumed collection of the VAT on
land at the end of last year as investment in
property development surged and house prices
rocketed.
The tough measure was announced
shortly after a top Chinese government think-tank
warned of the disastrous outcome of a possible
bubble-burst in the property market.
There
is at least one area in which the Chinese
government has a lot to learn from its former
nemesis, Japan: the property market. Or so says
the top think-tank, the Chinese Academy of Social
Sciences (CASS).
In a recently released
report, "2006-07: World Economy Analysis and
Forecast", CASS economists warn that if the
central government fails to rein in the country's
runaway real-estate sector, China could suffer an
economic collapse like the one that left Japan in
a 10-year period of stagnation in the 1990s.
The report advises Chinese leaders to
learn from the huge real-estate bubble that
developed in Japan during the 1980s, when the
country's low interest rates and rapidly
appreciating currency led to an overheated
property market much like the one China is
experiencing today.
Between 1985 and 1990,
land prices in Japan more than tripled, sending
home prices through the roof. The ensuing crash
led to more than 10 years of economic stagnation
from which the Japanese economy did not fully
recover until 2005.
"There are amazing
similarities between the current Chinese
real-estate market and that of Japan in the
1980s," the CASS report says.
It adds,
however, that China is "different from Japan" in
that "the Chinese government has adopted many
macro-regulatory measures in the sector since
2005, with good results. However, the measures
have not dealt with all the possible risks. China
still has a lot in common with Japan."
To
avoid a Japanese-style collapse, the report
recommends strengthening macroeconomic controls,
but analysts are skeptical. All forecasts are for
China's property prices to continue to rise this
year, spurred by the country's extraordinary
economic growth and a more limited land supply.
Zhang Xin, chief executive officer of the
Beijing-based property developer SOHO China, told
the state-run China Daily: "If the fundamental
factor, demand far exceeding supply, can't be
changed, property prices can hardly drop."
But supply-and-demand is a perverse
business in China's real-estate market. There are
far too many luxury properties going up in Chinese
cities while far too few affordable homes are
built for ordinary people. State media report that
low-cost housing accounted for only 5% of
investment in residential property last year.
That's why the government announced a set
of corrective measures that included the
requirement that homes smaller than 90 square
meters must account for at least 70% of the total
floor space for all new property projects. But
just last week a conflicted Ministry of
Construction issued a proposal to ease this
restriction, which is unpopular with developers,
but then retracted that proposal 21 hours after it
had been announced.
The about-face follows
the passing of a deadline, ignored by most cadres,
for local governments to report on their progress
toward meeting the 70% goal. Indeed, there are
reports that this intended reform is actually
exacerbating the housing problem because it has
forced a number of real-estate projects to be
adjusted or postponed, thus further limiting
supply and raising prices.
In 2006, the
price of newly built commercial houses in many
Chinese cities saw a year-on-year hike of more
than 10%, despite government policies aimed at
stabilizing housing prices, according to the
state-run Xinhua News Agency. The investment in
China's real-estate sector surged 24% year on year
in the first 11 months of 2006, 3 percentage
points higher than the growth in the first
quarter.
Another report shows that in
Beijing, as the Chinese capital prepares to host
next year's Summer Olympics, real-estate prices
have climbed 42% over the past three years. The
report, released
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
