School of the Built Environment Saving the banks at the expense of the property industry? Lessons from China J Albert Cao Department of Real Estate and Construction Oxford Brookes University Oxford, UK

The Chinese property market downturn The turning point came before the economic slowdown Not simply the result of government intervention to slow down housing price inflation Due to a combination of measures, with the crucial factor being the government/central bank’s act to protect the banks School of the Built Environment

The three cycles in China’s economic growth School of the Built Environment

The three property cycles in China School of the Built Environment

Lessons learnt: Financial stability is paramount Overheating and hyper-inflation in 1988 Chaos in the banking system in 1993 Triggered by massive property speculation Distressed assets and non-performing loans in 1998 Triggered by failed property development projects and the East Asia Financial Crisis Bankruptcy of the Guangdong International Trust and Investment Corporation School of the Built Environment

Property-led urban economic development A development model that involves the sale of state- owned land by local governments for property development and the provision of infrastructure funded by land sale proceeds. This model has been widely adopted in Chinese cities since 1990s to promote economic growth. --Cao and Keivani (2007)

Land sale revenues key to the property-led development model School of the Built Environment

Cumulative housing price inflation in China in the last decade School of the Built Environment

The macro-control: central intervention and local resistance First round People’s Bank of China in June 2003 to tighten credit on lending to high-end housing and commercial property development the State Council to calm local opposition by designating the real estate industry as a pillar industry Second round People’s Bank of China raising interest rates and tightening credits to property development Ministry of Land and Resources to tighten land supply The State Council to impose taxes on transactions, restrict foreign investment and encourage supply of housing Local governments to fuel land price inflation and to facilitate speculation and more market activities by non-action School of the Built Environment

Monetary policy plays a part in China’s intervention of the property market School of the Built Environment

The crucial factor: sharp reduction of loans to developers and home buyers School of the Built Environment

The wealth effect: the tumbling of the stock market School of the Built Environment

Housing price inflation in China since early 2007 School of the Built Environment

New Housing Price inflation in Beijing and Shanghai School of the Built Environment

Figure 3 Housing price inflation in Guangzhou School of the Built Environment

Housing price inflation in Shenzhen School of the Built Environment

Performance of the office market in Beijing School of the Built Environment

Performance of the office market in Shanghai School of the Built Environment

Impact on the property industry and the rescue Severe credit crunch to development firms Data from Jan to May 2009 Land purchase: down 28.6% y-o-y Housing new start: down 16.2% Housing development investment: up 4.4%, down from 35% last year GDP growth in Q1 2009: Shanghai: up 3.1%, down from 11.5% last year Beijing: up 6.1%, down from 11.3% last year Local rescue: lower taxes, cash bonus, and others Stimulus package: excessive lending in Q Rising housing prices in April and May 2009 School of the Built Environment

Conclusions The vigilance on the risks of the property market results in protection of the banking system Local resistance has resulted in late adjustment from the property industry, which caused widespread problems Major local economies face devastation due to the property-led urban economic growth model New challenge ahead to change economic growth model The risks inherent in the property market remain School of the Built Environment