Beijing Moves to Cool Housing Bubble

If dramatic new measures to cool China's property markets are any indication, it seems that the top Communist Party brass in Beijing watch Charlie Rose, too. A little more than two weeks ago, well-known hedge-fund manager James Chanos went on the popular TV show and said that China was on a "treadmill to hell" thanks to the bubble brewing in its property markets. "They can't afford to get off this heroin of property development; it's the only thing that keeps the economic growth numbers going," said Chanos. While it's not the only thing, it's a pretty important thing. At least a tenth of China's GDP comes from real-estate investment, and by some more-liberal estimates, real-estate and construction-related activities represent 60 percent of GDP.

Chanos, one of the first investors to see Enron coming, isn't the only one who's worried that Chinese property prices have been rising at their fastest rate in two years despite recent taxes introduced to curb speculation. Beijing is fretting, too--hence major policy changes that have acclerated in the past two weeks, which range from raising minimum down payments to tougher requirements on proof of residency to keep speculators at bay. Late last week, officials took the extreme action of telling banks, which are largely state controlled, to stop all lending on third home purchases. The government also said it would hold local officials responsible for keeping prices stable (which counters incentives for them to maximize land values). The Chinese blogosphere was immediately buzzing with recollections of Chen Liangyu, the former Shanghai Party chief whose defiance of Wen Jiabao's attempts to cool a previous property bubble may have ultimately played a role in his arrest for corruption in 2007.

As ever, it seems, when there are such directional shifts in Chinese policy, the underlying issue is stability. Skyrocketing property prices have put a strain on the middle class, not to mention lower-income Chinese, who already suffer from a lack of affordable housing. There's also a widespread sense that crony capitalism is running amok, with relationships between politicians and developers blamed for forced relocations of average Chinese. Earlier this month, the Chinese press reported on an incident in Hebei in which a villager was run over by a bulldozer and killed while protesting the demolition of her home. A recent and much viewed Internet video shows a family fighting off forced relocation in a rural district. Beijing knows it can't let anger over such incidents get out of hand. The big question now is whether the recent moves will be enough to stem the tide of hot money still flowing daily into Chinese real estate.

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