How New National Eight can Cool China Property Market

On 26 January 2011, China Premier Wen Jiabao chaired a State Council executive meeting and confirmed eight new key measures to cool the China property market (the so-called "New National Eight Articles", or simply "New National Eight" or "New State Eight") amidst inflation pressure. The eight key measures are now summarized as below:

Article 1:	Implement responsibilities of local government: Local governments assume responsibilities to ensure stable and healthy development of local property market. Local governments need to publicize their annual price control targets for new housing on a quarterly basis. Their targets should be reasonably determined according to the local economic development goals, as well as the affordability and average income growth of local residents.
Article 2:	Reinforce government-subsidized affordable housing projects: Enhance supply channels, building construction, estate management and rotating mechanism of the affordable housing. Increase supply of public rental housing.
Article 3:	Adjust and improve tax policy: Government will charge full sales tax for individuals who resales housing within a 5-year period. Conduct value-added land tax audit especially for real estate development projects with price level significantly higher than its surrounding region. Enhance the application of real estate evaluation technology to block tax loopholes. Speed up the establishment and improvement of a Property Information System to track property transactions on individuals in order to provide the basis for tax collection.
Article 4:	Enhance differential housing credit control policy: For all second-home buyers, minimum down payment is now raised to 60% from the previous 50% of the home value, and the interest rate of the bank loan should also be not less than 1.1 times the benchmark rate. Reinforce supervision on commercial banks for the credit control.
Article 5:	Strictly manage housing land and ensure sufficient housing land supply: Local governments must make sure at least 70% of overall land supply should be used for building medium-to-small sized flats. Supply of housing land in 2011 cannot be less than the last 2-year average level. Promote the use of "price restriction" on land auctions for building more medium-to-small sized flats. Conduct audit on capital sources for land auctions. Impose a fine and withdraw land from developers if they allow the land to stand idle for more than 2 years.
Article 6:	Regulate demand for housing market through "purchasing restriction": Permanent residents who already own one flat, or non-permanent residents who can provide tax proofs or social insurance contributions for a certain number of years can only purchase one (more) flat. Permanent residents who already own two flats, non-permanent residents who already own at least one flat, or non-permanent residents who fail to provide tax proofs or social insurance contributions for a certain number of years simply cannot purchase any (more) flat at all.
Article 7:	Implement accountability of local governments to ensure they fulfil the goals of the above 6 articles.
Article 8:	Strengthen mass media to redirect and promote rational home purchases. Investigate and ascertain where the responsibility lies for misleading news on property market.

Property prices are one of the main drivers of China inflation, which the Chinese central government is keen to keep under control.

According to the National Bureau of Statistics (NBS), China annual CPI turned out to be +3.3% YoY in 2010, already breached the government target of +3% level. This is the main reason why Beijing has to implement severe administrative interventions this time in order to curb skyrocketing home prices and real-estate speculation.

In recent years, although the Chinese central government said to control the property prices at a reasonable level, local governments were not keen to cool the soaring property prices especially because local governments reply on the premiums from land sales for a large chunk of their fiscal revenues.

In addition, the inconsistency in understanding of "reasonable property price level" between the central government and local governments also made it difficult for the central government to assess the effectiveness of property price control. The previous property price control results were, therefore, not satisfactory at all.

It was until end-2010 the central government realized that more actions must be taken to curb record home prices and tame inflation. On 26 December 2010, China premier Wen Jiabao spoke in a public broadcast that he would, with confidence, keep overall property prices within a reasonable level in his term. His term will last until 2013.

Now this "New National Eight", in particular, emphasizes responsibilities of local governments to ensure stable and healthy development of local property market, for the first time ever. It is also the first time to introduce the concept of annual price control targets for local governments. This will certainly make the central government easier to assess the effectiveness of property price control for each local government.

Although we are still optimistic about China property stocks in the long term, please be caution about the investment risk for SSE Properties sector in 2011. We believe there will at least be full of uncertainties for property stocks in this year.

As the "New National Eight" is obviously a more stringent policy than the previous "National Ten" or "National Five" and it is just a new start, we do expect the implementation of government cooling measures to contain the risk of escalating asset inflation will continuously pose threats to the China property market in 2011.