PBOC's Xu: Shouldn't Use Property Sector Stimulus Due Risks

     BEIJING (MNI) - China's property market is "an important source of

financial risk" and so should not be used as a means for macro-economic stimulus

in future, Xu Zhong, head of the research department at the People's Bank of

China, wrote in an article published Friday.

     "China in the past has used stimulation of the property sector as a tool

for macro-economy control," Xu said in China Finance, a magazine managed by the

central bank. "The sector itself has already become a serious problem which is

squeezing investment (out of other sectors) and curbing economic restructuring

and healthy development."

     In the past two years, China's housing price have risen too rapidly, with

prices in some cities at unreasonable levels, Xu said. The higher prices

consumer must pay for housing has squeezed the room for consumption growth and

investment in other sectors, widened the income gap, enhanced the economy's

leverage ratio and seriously threatened the stable and healthy development of

the economy. 

     Xu warned it would be "extremely easy" for a excessively rapid rise in

housing prices to trigger systemic financial risks that would counter China's

current efforts to restructure and upgrade the economy.

     "Under the unanimous expectation that housing prices will rise even amid a

slowing economy ... the excessive rise of housing prices has led to

over-allocation of resources to the property sector, which has accelerated the

climb in costs for the real economy ... and has (adversely) affected the healthy

development of the real economy," Xu said.

     Chinese central and local governments have intervened in the sector to an

inappropriate extent, leading to an imbalance in the proportion of land devoted

to residential as opposed to industrial development, he said.

     Xu urged the government to establish a property tax, arguing it would

become a key revenue source for local governments that would allow them to

reduce their fiscal reliance on land sales.

     A loose monetary policy, particularly a credit supply based on low interest

rates, was a contributing factor to the current bubble in the property sector,

he said.

     "When the supply-demand relationship is imbalanced and expectations are

unanimous that housing prices will continue to grow, investors tend to choose

value-protected assets such as property for investment and speculation," Xu

said. "Especially given land supply in China is controlled and lacks

flexibility, so that it cannot adjust to changes in housing prices, a

low-interest-rate credit supply is very likely to push the supply-demand

relationship to further into imbalance, causing housing prices to edge up."

     Xu stressed the need for a continuation of tight regulatory controls.

     "Any loosening of regulations in the financial sector would be a direct

cause for the formation of a bubble in the property sector," he said, citing the

housing market collapse in the U.S. in 2008 following the loosening of

regulations in earlier years.

     The country should maintain a prudent and neutral monetary policy to

provide an appropriate environment for reining in housing prices and promoting

structural reform, he said.

     Adding a limit on the growth rate of bank credit to the property sector to

banks' macro prudential assessments could be an option for strengthening

regulation and controls on the property sector, Xu stressed. It could help rein

in large fluctuations of housing prices.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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