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Shanghai Prepares for Property Tax to Curb 'Speculative' Buying; China Addresses Symptom NOT Problem

China's problem is rampant growth in money supply. Instead of curbing the problem, China prepares to address the symptoms, city by city it appears.

Please consider Shanghai Prepares for Property Tax to Curb 'Speculative' Buying

Shanghai, China's financial center, will this year prepare for a trial property tax, becoming one of the first cities in the nation to introduce the measure aimed at curbing "speculative" investment.

Mayor Han Zheng announced the move in a speech to the Municipal People's Congress yesterday, without giving details of how much the tax would be or when it would be implemented. Shanghai and southwestern Chongqing are the two cities that will begin trials of a property tax, according to a Jan. 10 report by Nomura Holdings Inc., which expects China to selectively introduce a tax rate of about 0.8 percent.

"We will step up macro-control measures, prioritize the supply of non-luxury residential units to be owned and occupied by ordinary citizens, and prepare for the trial reform on property tax as required by the central government," Han said.

China has pledged to speed up property tax trials to rein in surging prices that have made housing too expensive for an increasing proportion of the population. Premier Wen Jiabao said on Dec. 26 that measures control housing costs weren't well implemented and that he would introduce more policies to crack down on speculation. China has tightened rules on down payments, suspended mortgages for third homes last year.

Shanghai will begin building 220,000 units of subsidized housing as it pushes plans to create affordable homes, Han said in a report to the congress in Shanghai. The municipality aims to add 1 million units of subsidized housing from this year to 2015, he said.

Beijing won't join the property tax trial, the Beijing News reported today, citing Deputy Mayor Ji Lin. The Chinese capital will try to finish 100,000 units of subsidized housing this year, acting "firmly" to curb rising property prices, Xinhua said, citing Mayor Guo Jinlong.

Home prices in Shanghai jumped 26.1 percent in 2010 and those in Chongqing surged 29.4 percent, according to Soufun Holdings Ltd., the country's biggest real estate website owner.

Unworkable Measures

1. Offering subsidies to control housing prices adds to the demand for houses.

2. Taxing houses to curb prices is complete silliness if you are just going to turn around and subsidize the tax.

3. Even without the subsidy, the problem is not prices. Rapidly rising home prices are a symptom of too much credit.

In case you missed it, please see Chinese Bank Lending Spree Continues; $75 Billion New Loans First Week in January Alone; Inflation Gone Amuck

China's official inflation is 5%. Unofficially, estimates are 10% as noted in China's Foreign Exchange Reserves Jump by Record $199 Billion; Cost Push Inflation from China? Don't Count On It!

However, that does not count increases in home prices. It is an enormous mistake to ignore property bubbles, as the US found out, and as China, Australia, Canada, and the UK are going to find out.

Vacant China City Stories

China property bubble will overheat until it implodes. In the meantime, regardless of what China reports on the CPI, inflation remains a huge problem. Once again, those looking for inflation can find it in China, not the US, where consumer credit is contracting.

You cannot fight problems by attacking the symptom. It is tantamount to putting a person in a meat cooler to fight a fever.

In this case, excess credit will go somewhere else. Perhaps more commodity speculation.

Chinese Pig Farmers Speculate In Copper

This story is a little dated as it is from September 17, 2009, but it exemplifies the problem with fighting symptoms. Please consider China's Pig Farmers Amass Copper, Nickel

Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That's about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.

Sucden's estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.

Also see Pig Farmers are Making Brent Nervous, from November 11, 2009.

Before getting into to the relationship between copper and pork products, I want to draw your attention to what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, "It's pervasive; people are piling this stuff up in their backyards."

Michael Pettis on Lending Quotas

Inquiring minds are reading China's lending quota? by Michael Pettis.

It seems to me that if Beijing wants GDP growth in 2011 to come in at the expected 9%, the amount of new investment in China - which is determined in large part by the banking system - is really not something they can decide today. It is going to be whatever it needs to be given developments in household consumption growth and the trade surplus.

This is why I argued a few weeks ago that at whatever level the new loan quota was set, I was not going to think of it as constraining new lending in any way. Either the loan quota would be adjusted (upwards, almost inevitably) or more new lending would occur outside the banks' balance sheets, as it did in 2009 and 2010.

Investment this year I suspect is going to be extremely high, as high as in 2009 and 2010, because it is only with very high levels of investment that we are likely to manage GDP growth rates high enough to keep Beijing happy.

So my guess is that 2011 will be yet another year in this increasingly strained investment-driven party. Chinese GDP growth will continue to be the envy of the world, while those of us who worry about the sustainability and quality of the growth will worry more than ever. The banks will probably rush to expand lending in the first quarter, out of fear that they may be restricted later in the year. And of course we will all be watching the trade account very closely.

On the topic of trade I am going to put on my broken-record hat and say what I have been saying for two years. Forget about momentary thaws, feel-good speeches, and pious posturing. The global trade environment is not about to get better. All of the distortions and strains remain, and the crisis in Europe is putting more pressure than ever on a resolution. ....

China is overheating, it needs to slow the growth of credit. Instead, it is hell-bent on idiotic measures that cannot possibly work. So, China is going to overheat until it implodes.

In the meantime everyone is going gaga over China's growth and growth targets that are not possibly sustainable.

How do we know that? Easy, China's property bubble and inflation problem (massively understated at that), tells us all this "growth" is nothing but malinvestment, quite similar to the "growth" the US saw in its property bubble.

We know how that ended, and it will end the same way in China, Australia, Canada, the UK, and India as well.


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