FocusChina's aim to curb property spiral seen not good for petchems

19 March 2010 10:03  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Chinese petrochemical demand could be badly hit if Beijing takes the wrong policy decisions and causes another collapse in property pricing, warned a senior Singapore-based industry executive on Friday.

“The health of a large percentage of the global chemicals and polymer industries, and this really is no exaggeration, depends on how successful Beijing is in taking the heat out of the market,” said the petrochemicals executive, who wished not to be named.

“We don’t have any figures for China, but in the US the American Chemistry Council estimates that $16,000 of chemicals go into every new home that’s built in the States – including a wide range of plastics and adhesives and sealants.”

Petrochemicals commonly used in construction include among others adhesives, pipes, sealants, coatings, paints.

The booming property sector was a significant factor behind the steep rise in China’s imports of polymers and chemicals in 2009, the executive added.

“The dilemma the government faces is balancing the needs of investors over lower-income people…Investors, because of under-developed local financial markets, have few other places to park their money.

“But as real-estate values have increased, so has the resentment of the less well-off, particularly as a lot of condos are standing empty as the owners are living elsewhere,” he said.

Previous collapse of property prices took place in late 2007 when Beijing hiked interest rates aggressively, said several economists.

They said further cool down measures were expected in the light of a promise made by Wen Jiabao, China’s Prime Minister, to “rein in” speculators. Wen made the announcement at the opening of National People’s Congress (the country’s annual parliamentary meeting) this month.

Steps already taken include bigger down-payment requirements for second homes and the re-imposition of sales taxes for properties sold within five years.

Policy makers, however, know that the most effective way of controlling property-price inflation would be through a nationwide tax based on the value of properties, wrote commodity research manager, Rosealea Yao of GaveKal Dragonomics in a recent article.

GaveKal Dragonomics is a Beijing-based online economics research publication.

A trial tax based on property values has been levied in 10 provinces from 2006.

But Yao warned that there were widespread concerns over how such a tax should be calculated and its potential to dramatically drive prices down.

“One standard discount model suggests that a 1% tax (assuming mortgage interest rates stay at 4.5%) could cause property prices to fall by 18%," she added.

A sharp fall in property prices would not only hit homeowners, but also local governments as at their peak in 2007, land sales accounted for 55% of provincial authority income, she wrote.

“Despite these difficulties, policy makers are reluctant to rule a property tax out. If a tax pushed prices down by 15-20%, the (property) price-to-income ratio would fall from its current outlandish level of nine to around seven – within the norm for crowded Asian countries,” she continued.

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By: John Richardson
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