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Busch: Chinese Real Estate Party Over?

Xinhua News reported today that the government will target excessive growth in property prices in some cities.

This comes on the heels of the Chinese cabinet saying that it will impose a sales tax on homes sold within 5 years.

China, Chinese Flag
CNBC.com
China, Chinese Flag

China's Ministry of Finance has tightened rules regarding the purchasing of land, raising the minimum down payment for buyers to 50% as the government continues to clamp down on the real estate market amid growing concerns about a bubble forming in some large cities according to Xinhua.

The Ministry of Finance statement also said that developers need to pay the total cost of their purchases within a year, though some "special projects" will be exempt, Zhou Xiaoyun, deputy-chief engineer of the China Land Surveying and Planning Institute, was quoted as saying by the official Shanghai Securities News.

China property stocks got hammered on the news of the tax and dropped the most in four months. The Shanghai property index dropped 4.8% on the news. The largest developer, China Vanke Co. dropped 6.3% as did the second largest, Poly Real Estate Group Co, by 7.5%. The Shanghai composite index fell 2.05%.

On Tuesday, Fitch Ratings said China's red-hot property market is a concern for its sovereign credit rating because of the threat of worsening asset quality in the banking system. James McCormack, managing director of Asia Pacific sovereign ratings at Fitch, said, ''The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness." (Rtrs)

Unlike the rest of the G20, China targets lending levels for their banks and has them comply. This is high powered, high velocity money that spurs growth and speculation. This year, Chinese banks extended a total of 8.67 trillion yuan ($1.2 trillion) in new loans in the first nine months and are on target to breach 10 trillion yuan. This would be a 100% increase in lending from the original targets set at the beginning of the year. The fear is that this has created a Chinese real estate bubble that will burst.

While regulators are concerned over real estate, the loan target levels for 2010 are likely to be set at 8 trillion yuan. Therefore, the Chinese may be able to cool speculation in real estate, but the high lending levels will see speculation in some asset class continue. Commodities, equities, or even foreign real estate will be prime candidates.

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Andrew B. Busch is Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.