Market-oriented approach will bring dividends

Updated: 2014-11-17 11:07

By Cindy Chung and Ben Chow(China Daily)

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A major principle held dear by the incumbent Chinese leadership is to let the market play the decisive role in the allocation of social and economic resources. This principle has been applied to the design and implementation of property policies, as efforts have been made to use market-oriented measures to replace administrative ones in steering the real estate industry, an important driver of the economy, in the past year and a half.

This mindset can be found in the following practice.

Unlike its predecessor, the current leadership has never pledged to keep a lid on property prices. This is a wise move that showed a good understanding of the market.

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Officials from the previous administration had repeatedly vowed to crack down on property prices when they got out of hand, although the prices often skyrocketed despite government pledges. Even after administrative rules such as home-purchase bans were imposed, housing prices still shot up. From 2006 to 2012, average residential property prices in China more than doubled. In major cities, the prices tripled or quadrupled.

The current administration learned from its predecessor and stayed away from open promises of keeping a lid on property prices. This showed its respect for market forces. With the supply-and-demand relationship and economic fundamentals unchanged, it is hard to drag down housing prices simply with fierce purchase bans.

As for how to deal with rising property prices, the current government has adopted a distinctive approach. It has not adopted any administrative measures that specifically target the property market. Instead, it has focused on leveraging market forces, especially the money market.

This government apparently has a much tighter monetary policy than the previous one. One example of this was its hard-line stance in the middle of last year, when the People's Bank of China refused to save the market after commercial banks ran into a credit crunch and expected the central bank, out of habit, to massively inject money into the market.

Since then, lenders have become more cautious and adjusted their operating strategies to cater to a tight market. With money supply tightened, lenders have cut their loans to property buyers and shifted to other high-return projects, a change that has significantly curbed speculative property investment.

The central government has also refrained from intervening in decisions by commercial lenders and local governments. When commercial banks granted fewer loans to property buyers last year, critics called for the central government to step in. It didn't. Similarly, when banks recently loosened their loan requirements to attract more homebuyers amid a property slowdown, the government stayed quiet. When quite a number of local governments recently scrapped home-purchase limits to shore up the property market, central authorities also remained silent.

The inaction conveyed an important message from top policymakers: Let the market decide. In addition, allowing a loosening of purchase restrictions showed that the central government wanted the market to work itself out.

But the central government has done its bit by expanding the construction of less profitable affordable housing, increasing fixed-asset investment, improving social equality and boosting employment. This is exactly the duty of a government: Execute measures that benefit society that market participants cannot do.

Looking ahead, the central government will continue its market-oriented approach.

Specifically, it will not resort to great monetary loosening and it will not include the property market in its selected stimulus measures. The central government will be glad to see property bubbles burst in a gradual manner. Property developers will have to operate in a tight market in the months to come, with property-market consolidation to deepen.

But affordable housing projects will be supported as a move to offset the slowdown in the overall property market and ensure employment.

The next focus on the property market will be the introduction of the property tax. Using taxation to steer the market is what the central government is keen to pursue.

It may also scrap home-purchase bans in Beijing, Shanghai and Guangzhou. The bans are, after all, the legacy of administrative intervention.

But the government will step in to shore up the market if two things - employment and the systematic health of the financial market - are at risk. So long as the job market is stable and the financial system is not facing a meltdown, the central government will look on with folded arms.

The authors are analysts at Shanghai-based Universal Consultancy. The views do not necessarily reflect those of China Daily.