Despite the fact that parts of the Chinese economy have been opened up to overseas investment there is still a nagging suspicion that the Chinese government is far too influential in areas such as housing. When you have the leading housing minister Chen Zhenggao suggesting he is “fully confident” of the outlook for the country’s property market these suspicions are further fuelled. So, how can the Chinese government tighten its grip on the property market?
Despite the fact that China is an enormous country with a massive population the vast majority of the economic wealth and economic activity is centred round a relatively small number of cities. As a consequence, property prices in these more prominent cities have increased substantially giving concern to the “boom and bust” trend we have seen in years gone by. There is now a suggestion that this “urbanisation process” would be rolled out across other parts of the country thereby reducing pressure on property hotspots of years gone by.
In reality this is a perfectly valid strategy by the Chinese government as a means of cooling down the more buoyant local property markets. It is perhaps the forward looking “confidence” which is a little concerning because this confidence seems to be very deep-seated, perhaps even self-fulfilling?
Curbing speculative land investment
Since the year dot property investors have been maintaining their land banks going forward as a means of planning for the future. There is no doubt that this speculative investment has impacted property prices and land prices across China but is it right to introduce curbs to combat this issue?
It is obvious from a distance that an increase in the cost of property development land will ultimately impact the cost of the property and the cost to buyers. If the authorities can take some of the heat out of the Chinese land market then perhaps we could see a reduction in upward property price pressure? Then again, if so-called speculative investment is limited could this impact the supply of housing going forward?
One issue which has been discussed at great length by the Chinese government is capital controls to reduce the amount of overseas investment by Chinese investors. You might assume from this type of strategy that Chinese property prices were struggling but they still increased by 12.2% in the year to January 2017. It is also common knowledge that Chinese real estate investors are having a major impact upon many overseas markets as they look to balance their portfolios against a difficult domestic market. Is it right for the authorities to control the flow of capital overseas? Are we not taking a step back to the dark ages and the protectionism which Donald Trump has been so heavily criticised for?
While many investors will be concerned about the tighten grip the Chinese government maintains on the property market this has always been the case. Even though various areas of the Chinese economy have been opened up to overseas investment the government has always played a very active role. Quite why investors might expect the Chinese government to change its strategy today is puzzling although capital controls may well be a step too far. We shall see…..