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COMMENTARY

Easing could re-inflate China's housing bubble

Hong Kong

MONETARY relaxation could magnify China's housing headache, with Beijing wanting a more active fiscal policy to support wobbling economic growth.

A crackdown on shadow banking had cooled speculation, but easing tends to find its way into real estate one way or another. A thicket of rules might slow, but not stop, capital from pouring back into a frothy market.

China's property booms and busts tend to broadly track monetary conditions.

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So the government's call on July 23 for a more active fiscal stance - combined with indications the central bank might dial back its deleveraging drive - prompted speculation that another boom might be in the offing.

It would add momentum to an upswing already underway. An official home price index has gained for 38 consecutive months through June.

Officials are uncomfortable. High prices shut new homebuyers out of the market, and real estate's prominence means any bubble could ripple across the economy.

Many large cities have thus implemented higher minimum downpayments, limits on second-home purchases and mortgage lending curbs.

A clampdown on risky off-balance sheet lending has choked credit to developers and overly indebted buyers.

The restrictions had some effect. Loans to developers contracted 8 per cent year-on-year in the first half of 2018, according to ANZ.

Real estate investment in June rose at its slowest pace since last year; strip out land purchases and it actually started shrinking in recent months, note analysts at Capital Economics. In top-tier cities such as Beijing, outstanding home loans are at multi-year lows.

Still, priming the fiscal pump without letting money spill into property will be tricky. Success depends in part on the extent to which new rules have hived off real estate from the rest of the financial system.

Officials seem to have genuinely curbed some types of credit to developers, for instance. But past episodes have shown that Chinese individuals, companies, and officials are creative at getting around regulations when house prices start rising at double-digit rates.

Volatile stock markets and lack of access to overseas assets only encourage money to chase the Chinese asset class that has consistently produced superior returns. Policymakers have their work cut out.

China Evergrande Group said on August 6 that it expects core profit for the first half to more than double from a year before.

The statement comes after other developers, including Sunac China and Future Land Development Holdings, also issued positive profit alerts.

The southern Chinese city of Shenzhen said on July 31 that it would implement strict new property controls, including requiring residents to hold property for at least three years before reselling.

This comes after Chinese state media urged local governments to take action to curb property speculation. New home prices rose at their fastest pace in nearly two years in June.

Chinese policymakers plan to invest more in infrastructure projects and loosen borrowing restrictions on local governments in order to support the cooling economy, Reuters reported on July 27, citing sources.

The State Council on July 23 called for "more active" fiscal policy, including corporate tax cuts and an acceleration of so-called special bonds for local governments. BLOOMBERG

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