TheyÆre a start. The State Council issued a circular earlier this week detailing the specific measures to stabilise property prices. It marks the first concrete policy package since the State CouncilÆs ôsix pointsö guideline issued on May 18.
Here are the four key regulations that will have the most impact on cooling the market:
First, the government will raise the minimum mortgage downpayment ratio for first and second home buyers of apartments larger than 90 square meters to 30% from the previous 20%. ôThis is a bit tougher than our earlier expectation of no increase for first home buyers, but appears less aggressive on second home buyers,ö notes Jun Ma, chief economist, Greater China for Deutsche Bank Hong Kong.
He adds that many banks are in the process of raising actual downpayment ratios for second home buyers or high-end properties to 40-50%, in line with what Deutsche Bank had predicted.
But other analysts say that most speculative buyers are willing to put that much down anyway, so this increase wonÆt impact the market too much.
Second, the regulations will extend the applicable period for the 5% business tax on property transactions from two years to five years. Previously, owners who sold a property less than two years after purchasing it were subject to a 5% business tax on the proceeds. Now, the tax applies on transactions of properties held for less than five years. For luxury housing, a 5% business tax will be levied on the capital gains even after five years has elapsed.
Again, a banker focused on the mainland property market argued that a tax on property transactions of just 5% is a price speculators are willing to factor into their price when flipping properties. Extending it has less of an impact than raising it would.
Third, all local governments are required to ensure that 70% of land supply and total construction areas for residential developments will be for middle- and low-end housing projects.
Fourth, the government will confiscate the land use rights from developers that fail to start construction two years after the project commencement date agreed in the land supply contract.
While these two regulations certainly look good on paper, some analysts are sceptical that they can be effectively implemented.
But Deutsche's Ma points out that compared with earlier regulations, these policies are more clearly aimed at containing speculative demand and increasing supply of middle- and low-end housing. Furthermore the policy package avoids repeating earlier policy mistakes of limiting land supply while at the same time it tries to control demand. ôWith the State CouncilÆs strong determination to achieve the goal of price stabilisation (by sending investigation groups to key cities to monitor progress of policy enforcement), we think this policy package will be better enforced than those introduced in previous years,ö says Ma.
He continues: ôOur conclusion: We see downside risks to property transaction volumes and pricing in æoverheated citiesÆ over the coming months. We think it is too early for equity investors to bottom-fish property stocks, especially those with major exposure to Beijing, Shenzhen and Guangzhou. Relativley speaking, Shanghai is less vulnerable to this policy risk as it is not on the current list of "overheated" cities and tightening measures there should be no more aggressive than the national ones.ö
While the efficacy of these new rules remain to be seen, they are part of a larger government effort to cool the economy. In response to potential overheating, China's central bank on April 28 raised interest rates for the first time in 18 months, hiking the one-year benchmark lending rate by 27 basis points to 5,85%.
It is also trying to reduce banks' non-performing loans û though at the same time increase credit to small- and medium-sized enterprises. Fitch Ratings argues that Beijing is making inroads on reducing the number of current NPLs but is at risk of creating new ones.
"Asset quality indicators for China's largest banks and, by extension, the banking system as a whole have improved considerably, as illustrated by the more than 50% reduction in average NPL ratios over the last few years," says Charlene Chu, director in Fitch's Financial Institutions team in Beijing. "However, it is important to note that exposure to losses is highly concentrated at institutions that have yet to be restructured - for example, Agricultural Bank of China - while the reformed banks are less exposed."
Of greater concern to Chu is the likely creation of new non-performing loans given banks' still underdeveloped risk-management practices and internal controls. "We believe Chinese banks remain acutely vulnerable to an economic slowdown, although both banks and the government are more equipped today than in the past to deal with problems that may arise," says Chu.
The trick, of course, is for China to keep specific property bubble markets û from Beijing and Dalian to Shenzhen - from bursting, reduce NPLs but at the same time encourage growth at a steady pace û all without grinding to a halt the world's fastest-growing major economy.
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