Today's batch of rules to shrink the real estate bubble in China isn't likely to do the job either

04/20/2010 1:14 pm EST


Jim Jubak

Founder and Editor,

The regulators keep turning the screws on the Chinese real estate market.

After data showing that prices climbed at a record annual 11.7% rate in March, officials in Beijing know they have to do something. But they’re reluctant to take the big step of raising interest rates across the economy as a whole. Last time they did that, they sank the entire financial market.

So instead each day brings another move to tighten the rules in the hope that this step will be enough.

The newest rules focus on getting banks and property developers to behave.

The rules announced today, April 20, prohibit banks for making loans for third-home purchases and to buyers who can’t provide tax returns or provide proof of contributions to the national social security fund. Local officials will be able to limit the number of units that a buyer can buy.

In addition the Beijing government slapped rules on real estate developers designed to limit speculation. Developers can’t take deposits for sales of uncompleted apartments (well, at least not without government approval). That measure is intended to damp the buying frenzy that many developers have tried to create around apartments that haven’t even been built yet.

Other rules target other marketing tactics that developers have used to drive up prices. Developers now have to publicly disclose all apartments that are available for sale and will face stiff fines (or worse) for creating fake sale contracts to create the impression of a supply shortage.

The shares of Chinese property developers certain behaved like these rules will make a difference. For example, shares of China Vanke, the country’s largest property developer, fell 3.3% in Shanghai. The stock is now down 26% for 2010.

I’ve got my doubts. I think asset inflation is so embedded in the Chinese economy that I think the government will eventually have to take the big step and raise interest rates. I just don’t expect clearly reluctant officials to do it soon.
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