Author: Thomas Clouse



By Thomas Clouse



Racing ahead: Incentives are helping drive record Chinese auto sales

China’s real estate market continued to heat up in November, with housing prices in 70 large and medium-size cities rising 5.7% year on year, up from a 3.9% year-on-year increase in October. The rentto- price ratio also hit a record high in Beijing, increasing concerns that a real estate bubble is forming. To address such concerns, the Chinese government extended the time frame for a special tax on real estate sales. Properties re-sold within five years of their purchase will incur a 5.5% sales tax, reducing incentives for market speculators. Previously, the tax only applied to properties re-sold within two years. New bank lending totaled only 294.8 billion renminbi in November, after more than doubling to 8.67 trillion renminbi in the first three quarters of 2009. The slower loan growth, if the trend continues, could cool the market further. The government may be reluctant to take additional steps to cool the market, though, as real estate investment drives demand for construction-related industries.


Many of these construction-related industries are facing overcapacity problems, according to a report by the European Union Chamber of Commerce in China (EUCCC), a trend that could eventually cause friction with trading partners. The country’s stimulus projects and loose monetary policies have encouraged investments in industries such as steel, aluminum, cement and chemicals. Production is already high in these industries, and demand limited. Once the government stimulus projects are completed, the excess supply could flow into export markets, increasing trade tensions, the report concludes.


The automobile industry has soaked up some of the country’s excess supply, with China producing 1.39 million automobiles in November, an increase of 104.2% over November 2008, according to the China Association of Automobile Manufacturers. Sales also soared to 1.34 million, a year-on-year increase of 96.4%. Government policies to encourage purchases of fuel-efficient cars and rural-use vehicles boosted both production and sales of automobiles to more than 13 million in the first 11 months of last year, enabling China to overtake the US as the largest automobile market in the world in 2009. The government has pledged to continue such policies in 2010, though some tax breaks on smaller cars will be reduced while some subsidy amounts will be increased.