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China Attempts to Cool Hot Property Market

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China's growing economy attracts millions to the cities, fueling a housing boom and encouraging property speculation.

China's biggest cities are littered with construction sites and housing prices have skyrocketed: in some areas they have doubled in the past year, raising concerns the bubble could burst, damaging the whole economy.

To prepare for a worst-case scenario, the government ordered banks to test how a 60 percent drop in property prices would hit their balance sheets.

China's property market is highly interconnected with economic growth and the government recognizes the risks, said Bei Fu, a property sector expert at investment ratings agency Standard and Poors.

"That's why they have been quite proactive in controlling the market for this round of correction. Last year since second quarter of '09 the market started to rebound really strong. And, around fourth quarter the government already came out to have all these measures in place. And, so they keep pushing out measures gradually up to this April," said Bei Fu.

If the property market tumbled, it could leave China's banks with vast amounts of bad loans, as happened in the United States and Europe in 2008.  Additionally, as in the U.S. and other countries, if property sales slump, demand for consumer goods such as furniture and appliances could fall, hurting factories and retailers.

Beijing is limiting bank loans and has told state-owned companies to rein in property speculation.

But home prices remain high, especially for young adults like Shao Waner, who said it is better to rent until she has a strong, fixed economic base to purchase a home.  Shao Waner said she will reassess the housing market at the end of the year.  

Property analysts expect prices to drop by at least 10 percent this year because of the government's efforts to cool the market. But, many say creating a stable property market over the long term requires structural reforms such as an ownership tax.

China taxes property sales and rents, but not ownership. That encourages a glut of empty apartments and office buildings. All over the country, there are new buildings that stand half-full.

Vice president of marketing for the Wo Ai Wo Jia real estate agency Hu Jingjun thinks ownership taxes would get properties onto the market faster and help stabilize prices.  He said no matter much property is owned, no taxes are paid.  He described the current system as a big gap between China and many developed countries and mature markets.

Still, other real estate analysts say the outlook for China's property market is not entirely bleak.

Incomes here are rising quickly, especially in the cities, but most people have few investment avenues for their savings. They see buying an apartment as a good hedge against inflation.  

What is more, millions of rural residents hope to move to the cities where pay is better and they will need places to live. Analysts say the question is whether incomes can keep up with property prices.

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