Enzio's Clock

Background

1. Bubble - or squeak?

Recent press reports out here in Asia suggest that Beijing is about to clamp down on the property sector - because a bubble is building.

But is there a bubble?  We hardly think so.  We need not review China's trend towards urbanisation, one which mandates the building of office and residential space.  But perhaps we should remind readers that if people wish to buy residential properties in China, they are  saddled with a 40% down payment up front, meaning that one can borrow only for 60% of the bank's (i.e. not the market's!) valuation of the property. All of which means that only those people who can afford to buy are allowed to buy.

But there is plenty of "squeak" swirling  around the snowy streets of Beijing at present.  There is much chatter of -

•  Loan restrictions.  Last week, Housing Minister Jiang Weixin announced that the government "...would further restrict credit for the purchase of second homes and curb speculative housing investments".  Rumor has it that purchasers of secondary homes would have to make a down payment of 50% - versus the current 40%, and
  
• Other measures.  Last week, Premier Wen Jiabao proclaimed that price lurches in some cities would necessitate the imposition of measures concerning expansion of land supply, as well as tax measures like a
  
• 5-year lock up.  If owners don't want to pay a business tax of 5.5%, they have to hold the property for five years before re-selling it.  That lock up is set to stay, and a
• Property tax.  Then there is talk, nearly reaching crescendo levels. of the imposition of a nationwide  property tax.

2. The real problems

We do not use the term "squeak" disparagingly. After all, who wants to run a country the size of China from a city with the population of Manila?  Who really wants to have to create 100 million jobs a year just to keep a lid on social unrest?

However. the above "squeak" which we have alluded to is just that: it cannot be implemented: China's vested interests rule the property market.  As Shirley Yam noted in the South China Morning Post (SCMP) of this Saturday: "On the supply side, every player - be it the local government, developers private investors or state-owned companies who have showered with free loans from banks - have little interest or incentive to bring down property prices."

Next to the difficulty of implementation, the introduction of a property tax could be so badly handled as to cause a market slump - precisely what Beijing cannot want. 

So our guess is that whilst there will be plenty of chatter about introducing measures to cool the property market, these will contain more bark than bite: measures cannot be implemented effectively.

How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Buy into weakness in the property sector: China's  trend of urbanisation will continue inexorably, meaning that more homes and offices and infrastructure need be built.