The Chinese property market seems a long way from home and for a machine shop owner in Michigan or fabrication shop in Kansas it would be easy to think the state of the Chinese market is totally irrelevant to the fortunes of their business. But they would be wrong. China’s property market is a major driver of domestic bank lending, employment, GDP growth and metals consumption in the largest and most dynamic metals market in the world. To paraphrase that already well overused saying, when the Chinese apartment buyer sneezes we all stand to catch a cold.
As Gu Yunchang, secretary-general of the China Real Estate Association is quoted as saying in an FT article concerned by the rate of price rises in Chinese residential property, “The central and local governments cannot suppress the real estate market too much as it plays a crucial role in the whole economy, it is hoping to curb rapid price rises in some areas while maintaining steady growth in the property market. In other words it is trying to have its cake and eat it too.
Central to the strength of the Chinese consumer economy as the residential property has become, the authorities cannot allow it to continue climbing as it is. Even though they have some very sensible bank lending rules in place such as low loan to equity ratios, limits on second property ownership and taxes on properties sold in under fives years the fact is prices are rising too fast. Chinese real estate prices accelerated last month, rising by their fastest pace in two years despite government efforts to cool the market amid fears of a looming property bubble. According to the article, prices of commercial and residential property in China’s 70 largest cities rose by 10.7% in February from the same period a year earlier, a marked increase from the 9.5 per cent year-over-year gain in January, according to China’s statistics bureau. Doesn’t sound too bad does it, a 10% increase? But the figures released this week include subsidized and rent-controlled housing, where low price rises drag down the overall increase, as well as commercial real estate, where prices have been subdued or falling.
Analysts say house price rises are significantly higher. Mr Gu estimates the average rise is closer to 22% year over year.
The problem for the authorities is that Beijing cannot allow increases on this scale to continue or property will become too expensive and the migration of country workers to the cities will become impossible. Worse, it could cause social unrest as large parts of the country’s poorest workers find themselves left behind in the rush for a better life of which owning your own home is an important part in the cities. The hope for the rest of us is that while the government squeezes the banks and brings out new regulations they are also pouring billions into subsidized low cost housing. There have been promises towards this before but finally the authorities appear to be taking the issue seriously. If they are successful in cooling speculative building and can effectively boost low cost housing, the construction industry will maintain both employment and consumption sufficient to keep growth respectable. China is causing pressure on metals prices which we could do without but it is also an engine of growth for a world struggling to pull itself out of recession. Until western markets are growing strongly a robust Chinese economy is in all our interests.