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The Battle over Real EstateThe central government is brawling with local officials and developers in the property arena, and reforms are needed to address the root of the conflictCaixin Online25 July 2012China's real estate market is picking up again. But how much, you might ask.The number of cities where housing prices have declined fell by half from May to June, data recently released by the National Bureau of Statistics show. One-third of cities even recorded an increase in home prices. This data does not suggest any big fluctuations in housing prices. The number of people who support and oppose more regulatory measures is more or less the same. All this implies is that the property market remains deadlocked.The property market is where fierce battles between rival interests take place. Control measures for the property market have been constantly changing over the past decade because of resistance from interest groups and macroeconomic trends.Even decision-makers have admitted that control measures have not always worked. This current round of market-control measures has been the most severe since 2003, and effects are already being seen. However, people have begun to express doubt about how long their effect might last. Some fear housing prices are already on the rise and may spiral out of control.Two dominant stakeholders have emerged during this protracted battle. The first is the central government. It has to consider the macroeconomics of the situation and has the responsibility of addressing public concerns and protecting public interests. The second group is made up of local governments and property developers. The actions of the two sides account for fluctuations in the property market, and the outcomes of their battles are decisive to policy trends and housing prices.Rumours of policy relaxation have surfaced in many sectors of late. Officials have been quick to deny them, but there is never smoke without fire. With central leaders refusing to waver, the battles have become increasingly complex and intense.The central government is faced with the dilemma of trying to balance public interest with maintaining growth. Controlling housing prices can soothe the pressure on the people, calming discontent. However, since last year, downward pressures on the economy have been increasing significantly, causing major reforms to macroeconomic policies. How to control the degree of force used while implementing control measures has been a problem.For many years, local governments have been heavily dependent on income from land sales and they will not easily give up the revenue source. They will do almost anything to test or break the limits of the control measures and spare no effort cooking up massive projects with developers, most of them state-owned enterprises under the supervision of the central government. For example, some of these favourite enterprises have continued to buy land plots in Beijing for record high prices.All this constitutes a severe test of the central government's determination.Property already dominates the Chinese economy, and there is no easy way to separate it from the other sectors. In the next few years, property issues will remain a major challenge for the central government.Some choices have to be made and more courage is needed to deepen the reform in the following respects:First, the economic system must be reformed. The top priorities should be to abolish the government monopoly over the primary land market, to introduce a property tax and build enough low-income housing to guarantee a flat for everyone. Policy-makers may consider setting up a commission similar to the State-owned Assets Supervision and Administration Commission to manage state-owned land.
Second, a new mechanism for regulating local governments has to be established. It is necessary that local governments are motivated to carry out central government policies, so the jurisdictions of central authority and local authorities must be clearly defined and the system to assess the performance of local officials be reformed. The government's responsibilities over land management must also be redefined.Third, regulations on local governments must be strengthened and the long-standing practice of local protectionism must be reversed. To this end, direct central supervision is necessary in certain areas. This is particularly urgent for the courts, which should be made independent of local governments and party chiefs. If the powers of local officials are checked, they would better serve public interest and no longer consider a rise of property prices as a political achievement. Land transfers, income allocation and management would improve.Fourth, the management of incomes from state-owned land transfers should be better regulated. The income cannot and should not be viewed as the government's current fiscal surplus. Instead, it should be put into an account separate from government budget and managed by a specialized body.Changes of policies to control property prices over the last decade have proven once and again that the root of the problem must be tackled first. Property prices may rebound, so a comprehensive plan must be drawn up and a reform plan launched.
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