Jeff Byrne

    ANYONE with money to invest in China seems to think that buying property will provide them with a hedge against inflation.

    Despite continued attempts by the Central Government to curb soaring property prices, nothing has happened, so far, to bring housing prices down, let alone contain them.

    This is why the requirement for local governments to set targets for home prices by the end of March has become a joke. Beijing is the only city to cap prices where they are with, perhaps, a slight decline. Not much hope there for a return to realistic property pricing.

    But, the situation becomes quite absurd when local governments set targets for price increases at ridiculous levels when most people thought the idea was to curb prices, that is, put an end to price increases.

    Local governments cannot borrow money but they are allowed to set up local government financing vehicles which do the job for them. They have a vested interest in encouraging rising property prices. This is their revenue stream, their life support, so we cannot expect any sanity from them.

    Thus the local government debt bubble will continue to inflate.

    The Central Government is in a difficult position of maintaining a balanced economy by trying to engineer a “soft landing,” as local governments teeter on a mountain of debt.

    When the Central Government announced a 4 trillion yuan (US$615 billion) stimulus package in the wake of the global financial crisis, there were those who feared that a lot of that money would end up in the property and stock markets, which is precisely where a lot of it went.

    One of the problems of China’s command-led economy is that setting a GDP figure for future growth means that markets set about creating the conditions to meet the target.

    This does not create wealth.

    Speculative investment in the property and real estate markets returns little to the real economy. It merely goes into the pockets of those wealthy enough to invest. This just adds to the absurdity of setting price growth targets when the people want containment.

    One of the most obscene of the growth targets was that set by the Yushu government in Jilin Province, which keeps the price growth rate at no higher than in 2010. But here is where this degenerates into absurdity. The average price increase in 2010 was over 50 percent.

    The national average price-growth cap seems to be about 10 percent. Nothing has changed for the masses who cannot afford to buy a home despite Central Government hopes for a soft landing.

    Whether the property market lands with a crash or a thump is irrelevant. What is certain is that life in the property fast lane will inevitably come to a shuddering halt. What goes up must come down — eventually. This poses a definite danger of a recession. China obviously does not want this to happen, but there is no guarantee that it will be avoided.

    (The author is a Shenzhen Daily senior copy editor and writer.)