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back to index backCHINAtalk June,  2005

The gloves come off

Shanghai - Just under a year ago, I wrote a somewhat cagey piece about arterial tourniquets as an oblique comment on the government's gradual suffocation of the housing market by the so-called 'administrative control measures'. In my view, they would have been better served by taking either a hands off approach (never very likely) or doing something decisive. Now I have got what I wanted, sort of. The tourniquet approach to stop the bleeding has been forgotten and major surgery has been performed.

It is always easy for commentators sitting on the side lines to pick holes in government policy, but speculation in the market has been surgically removed. A final hurrah took place on May 31st when the queues at the real estate exchange bureau (where papers have to be submitted to transfer title) were as long and aggressive as the queues to buy flats just 2 months previously. Those in the queue were there to beat the deadline for a final flip before 5% tax on the sales price of properties sold within 2 years, an increase in deed tax from 1.5% to 3%, capital gains tax of 5% and a requirement on vendors to pay off the mortgage in full if selling within 12 months of purchase were introduced. So much for easy, tax-free unearned income.

The fact that it took a directive from Beijing for these measures to be introduced speaks volumes about the importance the Shanghai government places on the real estate industry, the fact that the government is the biggest developer, financier, land owner and regulator and, dare I say it, the existence of a 'lobby' to successfully prevent heavier intervention earlier. But something had to be done to slow things down.

I am penning this missive from Jiuhuashan in deepest Anhui, where I have brought my staff on a 'bonding outing' (climb every mountain and all that). The news here is that, according to the bus driver, property prices in nearby Qingyang have nearly doubled in the last 12 months. Why should this be? There is no rational reason that I can think of. Rents can't have gone up by that much and it is inconceivable that properties were undervalued by 100% 12 months ago.

The only logical reason can be excessive speculation fuelled by the high octane of easy credit. That can be particularly damaging in a developing housing market in a country where there are no independent checks and balances on the market or opportunities for the 'laobaixing' to vent their feelings without getting into trouble. Thus Beijing had to step in to take the hard decisions that couldn't be taken locally. Such a clear message resulted in a day at the office few will forget for the exchange bureau staff.

Previous comments from on high were that the government had two valves with which to control the market - supply side through land sales, approvals etc and demand side through financing. Now a third has been introduced, taxation. Perhaps I should say re-introduced, taxation has previously been used in Shanghai but only as an incentive to buyers from 1998 to 2003. I suspect we will be seeing more of this useful tool in other markets once the revenue starts flowing in.

Source: - GAI

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