China Curbs Property Speculators, Boosts Consumption

Dec. 10 (Bloomberg) -- China scrapped a tax break on property sales and extended subsidies for auto and home appliance purchases, seeking to cool speculation while sustaining a recovery in the world’s third-largest economy.

The State Council will re-impose a sales tax on homes sold within five years after cutting the period to two years in January, the cabinet said in a statement yesterday. The government will scale back some tax breaks for car buyers, while continuing to fund vehicle purchases in rural areas.

China’s property prices rose in November at the fastest pace in 16 months, a government survey showed today, reinforcing concern that record lending and a $586 billion stimulus package may lead to asset bubbles. The benchmark Shanghai Composite Index closed 0.5 percent higher as households-goods makers and some auto stocks gained. Property companies fell.

 There is a legitimate concern here that credit from the Chinese stimulus package may have fueled some incredible bubbles that are getting close to a bursting scenario. China has recently been suffering from cases of overcapacity in everything from steel to car production, and with every province vying to get its bigger share of the stimulus, a lot of bubbles have emerged in the property markets as well. There is little doubt that China is going into a property bubble right now, primarily fueled by the injection of so many funds into construction and the industries behind them, and while China has always been able to make the case that "there is eventual demand" given its huge rural population, the bubble may be growing too fast for reality to catch up. Putting these sales taxes back on the property markets will probably help to curb this, but the chances of it eliminating it are less than likely.

Boosting consumption is, of course, China's #2 goal now for as long as the tail of the fiscal crisis is considered to be where we currently are. The export market, accounting for over half of China's GDP, is now beginning to normalize with its domestic consumption due to helpful tax breaks on items such as automobiles. There is some speculation that a great many of these car purchases could be by local provincial governments, eager to make consumption appear high in their areas and get more funding, but reports from reputable China economy experts in the Wall Street Journal have recently cast doubt on such a wild scenario.

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