China Property Risk Is Worse Than in US

The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.

Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, said recent government measures to cool the property market needed to be part of a long-term push to bring high housing prices under control.

He added that there were still signs that the economy was overheating and recommended modest increases in interest rates and the level of the currency.

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”

He was speaking ahead of Monday’s announcement by the State Council that it had approved a plan to reform real estate taxes, the clearest indication yet that the government will for the first time impose an annual tax on some residential housing in order to rein in rising prices. The news sent shares in China down 2.4 percent.

The unusually forthright comments from Mr Li contrast with the growing view among economists that the crisis in Europe will lead China to avoid further measures to tighten policy, including currency appreciation.

Wen Jiabao, Chinese premier, reinforced that impression on Monday when he said it was too early for big economies to withdraw stimulus measures.

“The debt crisis in some European countries may impede Europe’s economic recovery,” he said in Tokyo. “China will make sure it maintains a sense of crisis.”

Mr Li said the high cost of housing could hamper future growth by slowing urbanization. Rising prices were also a potential political flashpoint, especially among younger people who felt locked out of the property market.

“When prices go up, many people, especially young people, become very anxious,” he said. “It is a social problem.”

In spite of the sharp slowdown in property sales and the troubles in Europe, he said economic activity was still too strong. “China is running the risk or is on the verge of overheating,” he said. Although he added: “I would say the situation is not out of control.”

As well as calling for modest increases in deposit rates, which are negative in real terms, he said a gradual appreciation in the currency would help companies prepare for when the renminbi was considerably stronger.