In China, housing boom spreads to the poor centre

XINYANG, China: Fan Wenbao swears he is not in the business of speculating on property. Already the owner of one home in Xinyang, a grimy city in the poor central province of Henan, he bought two more there last year.

"It's an investment not to make money but to save money. Interest rates in the bank are too low," said Fan, a real estate agent in a shiny silver suit.

"If I buy now, the property will steadily increase in value. And at least there's no way it can fall."

This might sound like the talk of a speculator in most places, but Fan's is a relatively long-term view when it comes to the Chinese housing market, one that has helped send property prices sharply higher and drawn the increasing attention of policymakers nearly 1,000 km north in Beijing.

Fan is not engaged in the kind of rapid buying and selling known as "chaofang", or stir-frying, that has driven property prices up by 50% in just a few weeks on the tropical island of Hainan, home to the country's hottest real estate.

In his hometown of Xinyang, many of whose one million people migrate to prosperous coastal areas for work, property prices rose a mere 10% last year.

But that is already enough to worry the central bank.

Property beckons to homeowners and speculators as the one asset in China that is performing well, and authorities are intensifying efforts to prevent a potentially destabilising housing bubble from forming in the world's third-largest economy.

Even the modest price appreciation seen in Xinyang clearly outstrips the country's benchmark deposit rate of 2.25%.

With inflation picking up and expected to flirt with 5% this year, people like Fan are waking up to the fact that their savings are at risk sitting in bank accounts.

Investment alternatives are few and far between in China. The stock market has been sluggish for nearly half a year and foreign investments are all but closed to ordinary people.

Bricks and mortar

Property, of course, has additional appeal.

"The old parts of the city are in bad shape. These developments are modern, spacious and full of greenery," said local travel agent Ma Zhong, 25, strolling through Xinyang's new district of government buildings, shopping centres and apartment complexes, vast swathes of which are still under construction.

The big question hanging over the Chinese property sector is the extent to which demand has come from owner-occupiers as opposed to investors hoping to quickly flip homes for a profit.

Rampant price rises in recent months persuaded Beijing to begin clamping down on speculators, fearing the fallout if any bubble were left to grow to monstrous proportions.

When real interest rates fell in 2007 as inflation rose, households shifted vast amounts of savings into the stock market, fuelling a steep rally. Its sudden collapse contributed to a loss of confidence that slowed the economy over the next year.

The obvious answer now would be to raise interest rates. But doing so could draw hot money from abroad into an economy already awash in cash and make it difficult for local governments to service the piles of debt that they racked up last year.

The central bank's moves in recent weeks to curb excessive loan growth have already hastened the slide in Chinese shares prices and roiled markets worldwide.

Ugly contest

"Beijing's strategy instead is to set up an ugliness contest: bank deposits are becoming unattractive, so administrative measures are used to make asset markets more unattractive still," said economist Paul Cavey with Macquarie Securities in Hong Kong.

He concluded in a recent client note that the government was winning the battle, for now.

A succession of pledges to crack down on reckless investment and steps to make second mortgages and transactions more costly have dampened sentiment. Programmes to build more affordable housing are also weighing on prices, even as they shape up as an engine of real estate investment in the coming years.

Sales of new apartments and existing homes in Beijing fell some 70% in the first three weeks of January from a year earlier, the Beijing News reported recently.

But policymakers would be premature in assuming that they have seen off a housing bubble.

Last Sunday in Xinyang was damp and chilly. The streets and shops were quiet.

Yet a steady flow of people visited the showroom of Bolin Harmonious Home, a 26-building complex that started selling its first block of apartments last year. The homes are surrounded by muddy fields, a 10-minute drive from the nearest office or mall.

"On the first day, almost all of the 400 units sold out. We've got the next phase coming on sale soon and we expect strong demand over Spring Festival," said Zhang Jing, 28, a saleswoman, referring to the Lunar New Year holiday next week.

"Things are developing a little bit quickly but these are great homes. They are convenient and have great potential." -- Reuters