China’s parallel property and infrastructure booms, locked in by government policy for yet another year, have driven the welcome recovery in commodity prices that has in turn ensured Australia maintains its magnificent record of growth.
But the price of this state-led underpinning of growth and jobs is uncertainty. No one knows when the hour of truth will come, when the destabilising mountain of debt that has created China’s ghost cities and roads and bridges to nowhere will topple over.
But the constant postponement of efforts to rein in such spending, and the resulting speculation, is bringing that hour closer.
The latest disappointment for those seeking signs that the property bubbles in cities around China would be steadily deflated came late last week.
A statement by China’s leaders, after an economic planning meeting in December, said: “Homes are for living and not speculating on”, and announced the establishment of a “long term mechanism” to prevent such bubbles.
The key mechanism under discussion was the introduction of a property tax, paid annually based on the property’s value, like rates in Australia.
In Shanghai, a tax is imposed at the rate of 0.6 per cent of 70 per cent of the assessed market value of all properties owned, except the family home. A similar tax is also imposed in Chongqing.
But implementation has been ineffective, said leading financial website Caixin, and the amount of money collected low.
Expectations had been strong among economists of a property tax — focusing on individuals and families with multiple properties — building on the experience of Shanghai and Chongqing being introduced nationally.
But these were dashed late last week, when Fu Ying, a former ambassador to Australia and now spokeswoman for the National People’s Congress, announced a draft property tax law would not be submitted to legislators for review this year. This indicated, said Caixin, that “legislation is not on the official agenda for 2017, and that implementation of such a levy will be kicked even further into the future”.
The property tax had met fierce opposition not only from developers but also from China’s local governments which depend heavily on land speculation and sales for their revenues.
Private property is leased for 70 years in China, with all land still owned by the state.
A requirement that senior party and government figures throughout the country register their assets has also come under consideration as part of the government’s anti-corruption measures. This widely anticipated move was also expected to have helped cool overheated real estate markets, since most such assets are held in property. But despite public discussion, such plans have not materialised either.
The gross domestic product growth figure released last week of 6.9 per cent for the first quarter was substantially driven, said Macquarie Securities’ China economics head Larry Hu, by “very strong property sales and investment”.
Fixed asset investment in urban areas increased 9.2 per cent in the quarter compared with the same period last year, 21 per cent of it derived from the property sector. This 9.2 per cent figure is up from a 8.1 per cent rise last year.
Investment strictly in property development rose 9.1 per cent in the first quarter, compared with 6.9 per cent last year. Raymond Yeung and David Qu of ANZ research underline that “the past few months have seen the Chinese economy returning to the investment-driven growth model”.
While the central government speaks of reining in speculation, preventing real estate bubbles, and also of “maintaining stable growth” — apparently contradictory goals — the underlying message that has the highest priority is clearly understood by the regional authorities, the banks and the developers: go for bust this year.
Underlying this priority is the most important single aim of the party-state for 2017: to create favourable conditions for the 19th five-yearly communist party congress in November, when President Xi Jinping aims to consolidate and strengthen his control. Xi last week announced the creation of a huge new economic zone at Xiongan, a district in Hebei province south of Beijing, which is at present best known for its rare wetlands.
ANZ researchers say “the scale will be massive”, with the infrastructure build-out intended to cover 2000sq km, a size similar to the city of Shenzhen with 12 million people next to Hong Kong.
The announcement underlines the government’s continuing reliance on investment for longer-term growth.
The national government has said that some of its agencies, and some large state-owned enterprises, will be directed to shift to Xiongan from Beijing.
The prospect is being discussed of this vast new city being developed more directly by the state than other cities in recent times in China — marking a partial return to the “danwei” way of life that had almost disappeared, whereby workers and their families are housed in the same area by their employers, who also provide other social services.
Six months ago the prices of new homes in Beijing were soaring 27.8 per cent year on year, in Shanghai by even more at 32.7 per cent, and in Shenzhen more again, at 34.1 per cent. Prices have cooled slightly as resulting clampdowns on speculation — including by raising down-payment requirements and mortgage interest rates, and limiting the number of properties families can own in one city — have had some effect.
But price rises in second-tier cities such as Shijiazhuang, Zhengzhou, Changsha and Haikou on Hainan Island have picked up at the same time.
Moody’s Investor Services estimates that up to 30 per cent of China’s GDP is driven by demand from the property and construction centres.
Caixin’s chief editor Hu Shuli said recently “it is obvious China’s property market has fallen into a vicious circle, with government controls pushing up prices, prompting further tightening”.
But, she said, the main factor causing price surges is a lack of land supply — on which local government should focus, in line with Premier Li Keqiang’s message in his annual work report last month.
She urged the introduction of a property tax, the reduction of local governments’ over-reliance on land auctions, the construction of housing in rural land designated for commercial development, and a change in education, welfare and household registration rules to reduce distortions — to “stamp out the phenomenon of families spending tens of thousands of dollars on unlivable pigeon-coop-sized houses near elite schools”.
By ROWAN CALLICK