Property bubble in China a cause for concern: IMF

The International Monetary Fund (IMF) remains concerned with the potential for a property price bubble in China even though the country’s elevated inflation rate may peak within the next month or two.

While efforts by China to cool the real estate sector have reduced transaction volumes and property price increases, home prices in some larger cities still look “bubbly”, Mr Nigel Chalk, IMF mission chief to China, told reporters yesterday while discussing the IMF’s annual health check of the Chinese economy – the world’s second-largest after the United States.

“As long as the cost of financing is low and other investment options are sparse, the propensity for property bubbles will remain and the government will have to take progressively tighter administrative measures to stem demand and dampen house price inflation,” the IMF review said.

Mr Chalk said China could address the risk of recurring property price bubbles by raising the cost of capital, introducing property taxes and developing alternate household savings vehicles.

Prices of newly-built homes in 44 of the 70 large and medium-sized Chinese cities covered in a government survey rose in June from the previous month, down from 50 cities in May, the National Bureau of Statistics said.

On a year-on-year basis, prices of newly-built homes in 67 of the 70 cities covered by the survey rose last month unchanged from the number recorded in the three months from March to May and lower than the 68 recorded in both January and February.

“The pressure for property price appreciation is still strong” despite the moderation, said GK Dragonomics principal analyst Rosealea Yao.

While inflation, which has become a pressing social and economic issue in China, is set to ease in coming months, unpredictable shocks from higher food and commodity prices could push the inflation rate higher again, the IMF said.

Mr Chalk added that Beijing had raised with the IMF the issue of high public debt in the US, Britain and elsewhere as a risk that could affect Chinese policies. Beijing has pressed the US to take “responsible” measures to boost market confidence in the dollar and US government debt, underscoring investor worries that Washington could default unless lawmakers raise a US$14.3-trillion (S$17.3-trillion) debt ceiling by an Aug 2 deadline.

The IMF repeated that the Chinese currency “remains substantially” below medium-term fundamentals. It said allowing the yuan to rise would be vital for planned financial reforms and rebalancing demand in China.

A footnote in the report by an IMF internal group put the yuan as undervalued somewhere between 3 per cent and 23 per cent against a basket of currencies, depending on the type of methodology used to calculate its value.

The IMF said China’s exchange rate regime alone may only have modest direct effects in tackling global economic imbalances. But the undervaluation of the currency held back progress in promoting economic rebalancing within China, away from an export-led growth model towards more domestic consumption.

Yesterday, the yuan rose 0.12 per cent to 6.4516 per US dollar, the biggest advance in a week. The currency reached a record high of 6.4505 earlier in the day, the strongest level since China unified official and market exchange rates at the end of 1993.

Source : Today – 22 Jul 2011

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