Wednesday, March 30, 2005

China appears to be increasingly committed to what are euphemistically referred to as "administrative measures" to address the growing contradictions of its dollar peg.
China's rising property prices pose a threat to the stability of Asia's second-largest economy and local officials who fail to take measures to rein in growth will be held to account, the country's highest ruling body said. . . .

``Local governments must put on the agenda the important task of stabilizing housing prices,'' said the State Council document, dated March 26. ``People in charge will be held responsible if there are no effective measures to prevent housing prices from rising too fast.''

Prices in Shanghai, China's biggest commercial city, surged 18 percent in the past year, according to the city government's property index. Shanghai's property prices are ``worthy of concern and attention,'' central bank Governor Zhou Xiaochuan said on March 9.

``Social stability is already at stake in some places such as Shanghai,'' said Qiu Zhicheng, analyst at Xiangcai Securities Co. in Shanghai. ``Wage earners cannot afford houses, and hatred toward richer property owners is growing.''

The State Council urged local governments to increase construction of cheaper homes for low-income families, make better use of idle land and slow the pace of housing demolitions to ease supply shortages.

The 16 banks operating in Shanghai yesterday agreed to stop making loans for homes that are being sold within a year of purchase to help cool speculation. The city government earlier this month imposed a 5.6 percent capital gains tax on such sales.
Another hike in Chinese interest rates has already been ruled out, as has a change in the dollar-renminbi exchange rate. As Brad Setser points out, clearly the Chinese want to spring a revaluation on the markets as a surprise rather than put out on open invitation for hot money speculation on their currency. And as a recent Business Week article points out, raising domestic interest rates only makes the task of sterilization more difficult. So administrative measures are looking like the only tool in the toolbox to hammer down runaway asset prices.

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