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China must avoid a housing slump

By Li Hong (chinadaily.com.cn)
Updated: 2008-07-17 16:21

An online reader's comment about China's urban housing market, which speaks for a majority of property buyers in the waiting, struck me. It said: The decline of home prices is so encouraging that we will keep wishing for the collective downfall of all real estate developers, local governments and banks that feed first and then profit from the previous bubbles, and the 'black mouths' – the hidden agents in the media and some market watchers who trumpeted for the developers.

A residential building is under construction in Yichang, Central China's Hubei Province, July 9, 2008. [Asianewsphoto]

"Prices go down? Never, ever in China," these 'mouths' shouted.

They have gone down. The prices in Shenzhen and other major cities in the South have plummeted by more than 30 percent since last year. Meanwhile, transactions tumbled in Beijing and Shanghai, as the wait-and-see mood has developed among potential buyers in the two largest metropolises in the country. More and more property developers choose to offer heavy refunds or discounts to lure buyers.

Many herald the decline and call for more. Some even advocate a boycott -- stopping buying houses for a year -- and bring the prices to the ground. I sympathize with them, but won't take their stand. First, the Central Government in Beijing won't sit idle and let it happen. Secondly, I firmly believe that a housing meltdown in China, on a scale identical to the year-long US mortgage troubles, will hurt everyone.

A remarkable economic slowdown in China, which economists call hard-landing, will not only jeopardize our dream of longing for sustainable prosperity, but also have international complications, making the cloudy world economy outlook even gloomier.

It is natural and justified for any individual home-buyer to keep a tight wallet and wait for the best time to clinch his/her bargain. A boycott, however, is uncalled for. It will hold the normal market supply and demand hostage; force property developers to the wall; and seriously harm the financial safety of Chinese banks.

As seen in Shenzhen and other cities, those who bought houses on mortgages last year when the prices were at their highest, now are reluctant to see to their former mortgage terms and some have decided to default on bank loans. If the prices continue decreasing, more defaults could ensue, threatening the money line of the lenders.

The housing market of the United States is a mirror. Remaining in the quagmire of the mortgage crisis, several US financial firms have collapsed and more are struggling to survive. California-based IndyMac, a large bank, has just failed because it was weighed down by huge low-quality mortgages. The housing crisis has brought the world's largest economy to a standstill.

Ben Bernanke, chairman of the US Federal Reserve board, testified before Congress Wednesday, and he stressed: "Financial stability is critical to economic stability." His testimony comes two days after the Federal government came to the rescue of two American mortgage giants: Fannie Mae and Freddie Mac.

Beijing authorities are apparently put on high alert. Premier Wen Jiabao, Vice-Premiers Li Keqiang and Wang Qishan have headed fact-finding groups to five of China's burgeoning coastal provinces to gauge the conditions there. Their agendas also include checking growing complaints that the rising value of the yuan has hurt the export industry and increased local unemployment.

Like the United States, a volatile housing market is one of the biggest threats to the Chinese economy. Helping stabilize the market is of vital importance. Once the prices go down, the market psychology prevails that consumers will want more reductions, resulting in a sales doldrum. The longer the slump lasts, the graver the danger it poses to bankers.

In addition, slumping home values, which will tend to make people feel less wealthy and less inclined to spend in the months ahead, represent significant downside risks to China's economy, which is also crippled by quite a high level of inflation.

So, to augment the fragile housing market sentiment, the central bank needs to clarify its monetary policy, and try to dampen market speculation that it will raise interest rates again this year. Once the signal is given, it will encourage buyers to set installments.

The latest statistics show China's economy has slowed down for a fourth straight quarter, rising 10.1 percent in April-June, after growing 10.6 percent in January-March. Later this year, other problems, including more failures of export-oriented businesses, less government investments into infrastructure after the Olympic Games and declining domestic consumption, could short circuit China's economic engine.

A stock market slump might not be that terrifying, but a housing slump is. Given all these uncertainties, Beijing needs to act.

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