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China takes steps to cool down its real estate market

January 11, 2010 |  9:31 am

China’s cabinet unveiled measures to cool off its real estate market, which has soared in Beijing and Shanghai, as it tries to avoid the fate of Dubai and the United States, where the bubble in prices burst.

In a directive issued Sunday, China’s state council said the nation’s banks and regulators should step up efforts to block speculative money flowing into the real estate sector. The notice mandated that any homeowner seeking to purchase another property would need a minimum down payment of 40%.

“With the recovery of the real estate market, such problems as excessively rising house prices have recently emerged in some cities, which call for great attention,” the state-run New China News Agency wrote, quoting the notice.

Shanghaitowers The directive also included orders to build more affordable housing to aid those priced out by rising costs. After slumping at the outset of the global financial crisis, housing prices in 70 large and medium-size cities in China rose 5.7% year-over-year in November.

The price increases have been a longer trend in China’s two premier cities. The New China News Agency cited a Goldman Sachs report that over the last six years, price increases in real estate have outpaced income increases by 30% in Shanghai and 80% in Beijing.

On Jan. 1, the central government re-imposed a sales tax on homes sold within five years of purchase. The time period  had been reduced to two years in January 2009 to jump-start a then-sagging market, state media said.

The central government fears that China’s promising economic activity will attract speculators betting on real estate, stocks and even an eventual appreciation of the yuan.

But the government's commitment to cooling off the real estate market, one of the chief drivers in China’s comeback, may be lukewarm. Some analysts say regulators would rather mitigate problems with speculators than cut off loans.

“We believe the government will continue to try to control the ‘speculative’ activity in this sector while supporting the volume and activity growth,” said Tao Wang, head of China Economic Research at UBS Securities.

“We do not expect the government to tighten the down-payment requirements further," he said, "or to cut credit access to developers. In addition, we expect the government to stimulate property supply in the coming months, including through more fiscal spending on low-end housing and increasing land supply.”

While the rest of the world is still crawling out the economic crisis, China continues to grab headlines for its growth.

Data released today showed China surging past the U.S. as the world’s largest auto market. Last year, 13.6 million vehicles were sold in China, compared with just over 10 million in the U.S.

China’s exports also increased 17.7% in December from a year earlier -- the first increase in 14 months and a gain that helped China overtake Germany as the world’s second-largest exporter.

-- David Pierson, reporting from Beijing

Photo: The Shanghai skyline. Credit: Qilai Shen / EPA