CHINA - The Chinese government's attempts to contain a property price bubble could impact overseas joint-venture investors, according to a China-based economist.
"Often the reason for overseas institutional investors to use joint ventures is to get access to investments they couldn't get without one, so they'd be more vulnerable to measures to restrict domestic liquidity than investments open to foreigners directly," said the economist, who asked not to be named.
His comments came amid speculation over the next tranche of policy measures designed to cool the Chinese property market. In addition to interest rate hikes, market-controlling measures could include instructing banks to slow loan growth, raising minimum deposits and interest rates for mortgages, reintroducing a sales tax and announcing an outright ban on families buying third homes in large cities.
"Unlike interest rates, a property holding tax, if it's enforced properly - a big if - increases the cost of holding property for anyone, not just people who've borrowed," said the economist. "It'll discourage new cash buyers and encourage existing ones to sell, putting downward pressure on prices."
Andy Xie, former chief Asian economist at Morgan Stanley, has already spoken of "absolute oversupply", with developers having already built more urban residential than the current - and likely future - urban population wants.
Measures to increase banks' reserve ratios will reduce the money chasing property - a move likely to affect the stock market but not necessarily liquid overseas pension funds. In fact, the recent equity market weakness could also be helping sustain property, as investors take the cash out of equities and put it in real estate, said the economist.
"The main effect of government measures would be a sell-off in the stock market as participants start to worry about property companies, banks and domestic demand more broadly," he said. "This could knock-on to concerns about the renminbi, and that could spark further trade tensions."
In the meantime, although a further rise in interest rates is likely, the government will be reluctant to put upward pressure on the currency until there are clearer signs of worldwide recovery.
There are political, as well as economic, reasons why measures introduced so far haven't worked. Central control in China is weaker than it appears, he pointed out. "Many companies have local political or other connections with banks so they can override central commands."
He added: "The legitimacy of the current government depends on it delivering increasing living standards. That is one reason they're so desperate to avoid a downturn. But they're playing a capitalist-ish game with poor regulation and corruption, and they could well be on the way to a big Minsky moment [the point at which profits are insufficient to pay off debts taken on during investment bubbles]."