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Housing boom in China now spreads to smaller cities

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China’s property boom is shifting from Beijing and Shanghai as government measures to curb the market haven’t kept prices from rising in secondary cities.

New home prices rose in 67 of 70 cities in May led by smaller centres as developers hold off price cuts, even as existing home prices cool following higher interest rates and down-payment requirements. Standard & Poor’s on June 15 cut its outlook on Chinese developers, echoing concerns of a property bubble aired by bears such as hedge fund manager Jim Chanos.

Efforts to rein in have been focused on the nation’s largest urban areas, leaving less affluent cities such as Urumqi in the northwest and northeastern Dandong with surging home values as developers increased building there. That raises challenges for a government that last week escalated its fight against by raising bank reserve requirements for the ninth time since October.

“Purchase restrictions in the major cities drove speculators to second- and third-tier cities,” said Liu Li-Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd in Hong Kong.

“China should raise interest rates and basically use monetary policies to curb demand, otherwise negative interest rates and few appealing options will send more speculation into the property market.”

Debate that’s been raging for more than a year is now intensifying over what the shifting boom signals. To bears, it is a sign one of the world’s most toxic asset bubbles is still inflating, fueled by speculative buying and cheap credit. To economist Stephen Roach and hedge fund manager Chris Ruffle, the bubble fears are overblown as incomes rise and the largest urbanisation in history continues.

“I can’t say a bubble will never happen,” Roach, non- executive chairman of Morgan Stanley Asia Ltd, said in an interview in Shanghai last week. “The important signal Chinese authorities have sent is that unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem.”

The stock market seems to agree. A measure of on the Shanghai Composite Index is the only industry group that is up this year. It has gained 4.5 per cent, while the benchmark is down 5.7 per cent. China State Construction Engineering Corp. has added 14 per cent in 2011, while Poly Real Estate Group Co has added 7.4 per cent. China’s investment in residential property accounted for 6.1 per cent of gross domestic product last year, the same level as the record in the US in 2005 preceding the subprime crisis there, according to Citigroup Inc. The government is prepared to sacrifice 1 percentage point to 1.5 percentage points of GDP growth to curb the property market, Citigroup economists led by Shuang Ding and Minggao Shen stated.

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