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China faces policy dilemma as home prices jump in GDP boost

Policymakers in China were facing the dilemma of driving growth while preventing the property market from overheating, an economist said Monday as prices in the world's second largest economy jumped in August.

Average new home prices in China's 70 major cities rose 9.2 percent in August from a year earlier, accelerating from a 7.9 percent increase in July, an official survey from the National Bureau of Statistics showed Monday. Home prices rose 1.5 percent from July.

But according to Donna Kwok, senior China economist at UBS, the importance of the property sector to China's overall economic health, posed a challenge. It contributes up to one-third of GDP as its effects filter through to related businesses such as heavy industries and raw materials.

"On the one hand, they need to temper the signs of froth that we are seeing in the higher-tier cities. On the other hand, they are still having to rely on the (market's) contribution to headline GDP growth that property investment as the wholewhich is still reliant on the lower-tier city recoverygenerates…so that 6.5 to 7 percent annual growth target is still met for this year," Kwok told CNBC's "Street Signs."

The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2 percent and 23.5 percent, respectively.

Home prices in the second tier cities of Xiamen and Hefei saw the larges price gains, rising 43.8 percent and 40.3 percent respectively, from a year ago.

Earlier, the Chinese government introduced measures aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown.

While the moves have boosted prices in top-tier cities with some spillover in lower-tier cities, there were still concerns of uneven bubbles in the market.

"We are seeing potential signs of selective pockets of bubbles appearing again, especially in tier 1 and tier 2 cities," Kwok said.

The Chinese government in the meantime was rolling out selective cooling measures in these cities to try to even out growth.

"If it's navigated in a such a way that the (positive) spillover to the adjacent tier 3 cities continues to spread further, then maybe that's where you may get a first or second best outcome resulting," she added.

Reuters contributed to this article.

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