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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Weekend Edition Singapore Asia Pacific World China property taxes a stab at dousing inflation By ELAINE KURTENBACH,AP Business Writer - Friday, February 4 Send IM Story Print SHANGHAI – China's latest maneuver in its war on inflation _ new property taxes for two of its biggest cities _ looks likely to have little impact on wider price pressures or on the flood of investment that some here fear is feeding a potentially destabilizing bubble. A raft of new measures meant to rein in surging housing prices announced last week culminated with a widely expected announcement of the property taxes for China's commercial center Shanghai and the southwestern city of Chongqing. So far, the taxes, which apply only to new purchases of relatively expensive housing, mainly for investment purposes, are drawing a skeptical response. "For those who already own a few apartments and have made a big fortune from trading property in Shanghai, the new rules mean nothing at all," said Liang Chenkui, a 28-year-old legal assistant in Shanghai who used all his savings and much of his parents' to buy an apartment in a northern Shanghai suburb last year. News of the new taxes caused barely a ripple in local financial markets and as the lack of any serious implications for property developers has hit home, real estate shares have rebounded. Shanghai and Chongqing, both home to more than 20 million people, are among many Chinese cities that have seen housing prices soar by double digits in recent years, burdening family budgets already strained by surging costs for food, utilities and other necessities. "How to prevent a hard landing of the housing market remains the biggest policy challenge for China. Despite the harsh administrative controls, most of the market fundamentals that have been driving up home prices have remained largely unchanged," economist Xianfang Ren of IHS Global Insight said in an analysis of the recent policy moves. The communist leadership, as usual treading a fine line between too little and too much control of the economy, has repeatedly ordered banks to raise the amount of capital they must keep in reserves, and hiked interest rates, twice. Many analysts believe another rate hike is coming soon. Experts remain divided over whether China is already in the midst of a property bubble. In Shanghai, housing prices rose to a record average of 24,176 yuan ($3,652) per square meter in December, state media reported, up 7.6 percent from November and up 21 percent from January 2010. Overall, however, levels of debt remain much lower than in the bubble days seen in Japan and the U.S., thanks to hefty required downpayments and the preference among many families for paying cash rather than taking out mortgages. Most in the industry expect the huge demand for better housing and work space among China's 1.3 billion people to ensure prices will remain relatively stable _ but high. "I don't believe there's a property bubble," says Vincent Lo, chairman of property developer Shui On Land, who "put his money where his mouth was," he says, spending 3.5 billion yuan ($530 million) for a choice piece of real estate in Shanghai's new Hongqiao transport hub. But China's ability to contain inflation remains key, both for its own stable growth and for the region, the ratings agency Moody Investors Service said in a report that described real estate in the country's biggest cities as "frothy." The tinkering with the property market is symbolically important for a government worried over the destabilizing impact of past bouts of inflation but can't counter other pressures building in the economy. The consumer price index fell to 4.6 percent in December from a 28-month high of 5.1 percent the month before but is likely to exceed 5 percent in January and remain at about that level, says Wang Tao, an economist at UBS. Food costs, a strong component of the consumer price index, are unlikely to moderate much given the drought that is stunting winter wheat in north China, while vegetable and fruit crops wither in icy weather in the south. China's inflation problems also reflect strains within its booming economy, chief among them a flood of lending by state-owned banks and other financial institutions that helped deflect the blow to exports from the financial crisis but is now complicating Beijing's effort to cool inflation. "With liquidity abundant, bank credit growth having accelerated, and real interest rates remaining negative, the risk of inflation spreading to the overall economy is high and rising, along with inflation expectations," says Wang, pointing to rising nonfood costs such as clothing, rents, utilities and medicines. Banks and other financial institutions put 2 trillion yuan ($303 billion) into the property sector in 2010 and lending remained robust in January, though final figures are due in mid-February. In the longer term, some worry over the potential repercussions from ballooning levels of unreported debt among local governments and property developers _ amounting to hundreds of billions of dollars on loans for projects that may never pay back. At the very least, the torrent of lending is eroding banks' capital bases, Moody's warned. Beijing's piecemeal measures to cool the property market have fallen short of reforms that could counter local officials' strong incentive to push more investment, both for the sake of land sale revenues and to maximize their own earnings from real estate investments. For families and companies, too, with bank savings rates still negative and stocks in the doldrums, property is one of the few available investment options whose long-term gains can beat inflation. The Finance Ministry characterized the new taxes, of between 0.4 percent to 1.2 percent of purchasing prices for new homes in the two cities, as a way to rebalance income and "narrow the gap between rich and poor." The money raised will be used to fund affordable housing, it said. The government rolled out the property tax plan a day after announcing it would require buyers of second homes to make a 60 percent down payment, up from 50 percent. Authorities also have expanded restrictions on home purchases to provincial cities, which lag big coastal centers but are seeing property booms of their own. Such restrictions will do little for China's many millions of have-nots, and for younger generations already priced out of the market, says Liang. "Most normal people in Shanghai, like me, would be satisfied just to get one apartment," he said. 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