Beijing in vanguard of revolution as US dominion ends

By JohnTian | Published: 2009/08/22

China surprised this year when it overtook the US to become the biggest vehicle market, several years ahead of expectations.

Now Beijing plans to leapfrog a generation of automotive technology to lead the green car revolution.

Chinese vehicle makers rely heavily on foreign technology to produce internal combustion cars.

But Beijing is investing heavily in electric and other alternative technology, with the goal of exploiting Chinese cash, brains and central planning to jump ahead of older makers in the brave new world of environmentally friendly cars.

That is the kind of ambition that captures imaginations and headlines in the west, where the US’s century of dominance of the car industry has come to an ignominious end.

But is China really ready to lead the world to a greener automotive future?

When it comes to the next generation of alternative fuel vehicles, everyone agrees that much will depend on the government.

“China could be the country that leads the world in switching to electric vehicles,” says Kevin Wale, China head of GM, which plans to sell its Volt hybrid electric car in China.

But Chery, a leading Chinese maker which is also developing electric and hybrid-electric vehicles, says such cars are “very expensive without government help” in the form of direct buyer subsidies.

“China appears to be serious about going electric,” says Mike Dunne, motor analyst at JD Power, the consultancy, in Shanghai.

In February, Beijing said its target was 5 per cent of “new energy vehicles” by 2011, and in April it announced $8,000 subsidies for buying electric vehicles and investment in car battery charging stations in some cities.

“The major hitch continues to be price,” says Mr Dunne. “Even with subsidy, buyers need to pay a premium for electrics.”

He points out that only 899 Prius hybrid cars were sold in China last year.

“That just puts things in perspective.”

Yale Zhang of CSM, the consultancy in Shanghai, says infrastructure is vital.

Electric car recharging stations will be important in a country where so few people have garages with electric outlets.

In cities such as Shanghai, where the limited range of such vehicles might make them an attractive choice, most people live in high rise flats. Carrying a car battery up 10 or 20 floors, even in a lift, might not be appealing.

Warren Buffett, the US investor, is so confident of the future of China’s electric cars that he has bought a 10 per cent stake in BYD, the battery-turned-car group hoping to be at the forfront of China’s electric car revolution.

BYD has started selling hybrid electric cars in some markets in China.

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CHINA STIMULUS RISKS DAMAGING DEVELOPMENT

By JohnTian | Published: 2009/08/22

China’s much-vaunted stimulus package has exacerbated structural imbalances in the economy and may delay the country’s transition to a more sustainable growth model, according to some leading economists.

Most analysts regard the Rmb4,000bn ($585bn, €410bn, £355bn) plan, unveiled in November, as an appropriate response to the crisis and say it pulled the economy out of what could have been a much deeper slump.

However, as the effects of the stimulus fade, some now say the response was too aggressive and that the government’s focus on an unprecedented credit expansion and a massive infrastructure boost has aggravated the country’s stark economic imbalances.

“The economy’s structural problems have been made worse by the stimulus programme,” Wang Yijiang, a professor of economics at the Cheung Kong Graduate School of Business in Beijing, told the Financial Times.

He pointed to resurgent asset bubbles in the stock and property markets and the fact that most of the stimulus had gone to the state sector, while smaller private enterprises, which create the most jobs, had been left largely to fend for themselves.

“The stimulus package was a response to a crisis rather than aimed at rebalancing China’s growth model,” said Jonathan Woetzel, a director in McKinsey’s Shanghai office. “In the short term, Beijing’s stimulus and monetary policy are perpetuating the imbalances.”

A report published today by the McKinsey Global Institute points out that 89 per cent of the entire stimulus package is devoted to infrastructure investment such as roads and railways, while just 8 per cent is allocated to supporting consumption.

Private consumption in China has declined sharply as a share of overall GDP since the mid-1980s, accounting for only 36 per cent – the lowest ratio of any major economy, reflecting China’s reliance on investment as its main growth driver.

“Today’s low consumption share is systemic, and China will not be able to tackle this issue without comprehensive reform that includes structural change,” says the report.

“China’s economic growth profile has been very employment-light and there is a need to rebalance investment away from the traditional emphasis on heavy industry and infrastructure towards smaller, private enterprises, especially in the services sector,” said Mr Woetzel.

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Investors take heart as Shanghai bounces back

By JohnTian | Published: 2009/08/22

A powerful rebound for Chinese stocks offered an encouraging backdrop for global equity markets yesterday, although the broader risk environment was more mixed.

The Shanghai Composite index leapt 4.5 per cent – its biggest one-day rise since March – amid hopes of government action to support the market following its slide since the start of the month.

“China is currently being watched as a bellwether with concerns that the recent collapse in Chinese equities may act as a leading indicator for global equities,” said Sreekala Kochugovindan, asset allocation strategist at Barclays Capital.

“However, the latest bout of risk aversion has occurred against the backdrop of low volumes. History suggests that trends established during periods of low trading volumes have swiftly petered out once volumes picked up.”

Shanghai’s advance helped other Asian equity markets rebound, with the Nikkei 225 in Tokyo rising 1.8 per cent and Hong Kong 1.9 per cent.

Europe followed suit, with the FTSE Eurofirst 300 gaining 1.4 per cent, while the S&P 500 was up 0.8 per cent by midday in New York.

US investors focused on the positives in what turned out to be a fairly mixed bag of economic releases. “It seems that more so than ever each trickle of data has even greater meaning attached to it at present,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

“That’s probably due to the growing wariness over whether the patchwork quilt sewn together by government and central banks is sufficient to warm the consumer until artificial demand can be adequately replaced by genuine consumer demand.”

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China acts to reduce health bills

By JohnTian | Published: 2009/08/19

China has moved to control healthcare costs from Beijing for its citizens, setting plans to purchase and distribute hundreds of essential medicines that are now mostly sold at huge mark-up prices through hospital pharmacies.

The measures are part of an Rmb850bn ($124bn, €88bn, £75bn) overhaul of the country’s ailing health system, aimed at securing basic medical services for every citizen and increasing efficiency and transparency in drug use.

When Beijing began reforming its communist economy 30 years ago it discontinued free healthcare for all and, by 2000, the majority of the population was uninsured. Although the authorities have since tried to build a new healthcare system, large numbers of rural residents and migrant workers still cannot afford healthcare.

“By 2003, 30 per cent of poor households in the government’s National Health Survey were reporting healthcare costs as the main cause of their poverty,” the World Bank said in a report on health reform in China this year.

The World Bank said misaligned incentives encouraged hospitals to make money from selling drugs. China’s share of pharmaceutical expenditure relative to total health expenditure was nearly 45 per cent in 2003, compared with an OECD average of about 15 per cent.

Beijing has pledged to decouple hospital revenues from pharmaceuticals sales. “The essential drugs used in government clinics will be purchased centrally through government-controlled institutions, to be picked by provincial governments,” the health ministry said in guidelines published this week. Other clinics would also have to buy these medicines through similar mechanisms.

Beijing said that, under the essential drug system, patients could receive their medicine from independent pharmacies with a prescription from a doctor. The government added that it would set prices for the listed drugs, with adjustments every three years. It aims to get 30 per cent of all grassroots health institutions – small, mostly rural clinics – on board this year.

Analysts said much remained unclear as the list published this week only covered grassroots clinics and medicines for basic treatment of common illnesses, including aspirin and some antibiotics.

“Now we know that demand for the drugs that made it on to the list is certain to increase, but the key point of how prices are to be set hasn’t been addressed yet,” said Zhang Yin, an analyst at Bank of China International.

He added that there were clear benefits for producers of traditional Chinese medicines, because the traditional remedies on the list were mostly proprietary products, so suppliers would face no competition. The western drugs on the list are almost all compounds available in generic form.

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Architects win Chinese banking projects

By JohnTian | Published: 2009/08/19

RMJM, one of the world’s biggest architectural practices, has won a slew of design commissions from state-owned Chinese banks.

Eighteen months ago the UK-based group won the contract to design a 200-metre high headquarters for China Merchants Bank on Shanghai’s Bund, which is under construction.

This was RMJM’s first banking project in China, though the group designed the convention centre for the Beijing Olympics and employs 150 architects in Hong Kong.

But it has also won three more design contracts in China – to build a stock exchange and headquarters for the securities arm of China Merchants Bank in Shenzhen, a 250,000-square-metre credit card centre for the same bank in Chengdu and a headquarters for the Ningbo Construction Bank in its home city.

David Pringle, RMJM’s director for Asia and the Middle East, said this investment reflected a desire by Chinese banks to expand their operations into areas such as credit cards and telephone and internet banking.

Mr Pringle said his Edinburgh-based firm – with more than 1,000 staff in 16 offices round the world – had seen “absolutely no slowdown” in work in China.

In July RMJM relocated its Asia-Pacific headquarters in Hong Kong, moving from a city centre corporate tower to a former warehouse in Quarry Bay, on the island’s eastern side.

The group said it expected activity levels in this part of the world would be in excess of its pre-recession peak within a matter of months, and predicted it would be under pressure to recruit staff.

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Chinese activist arrested for tax evasion

By JohnTian | Published: 2009/08/19

Xu Zhiyong, a Chinese legal scholar and aid campaigner, has been formally arrested on tax evasion charges, in the latest step in Beijing’s crackdown on legal activists.

Beijing University of Posts and Telecommunications, where Mr Xu teaches law, was notified of his official arrest, said Zhou Ze, Mr Xu’s lawyer. “This letter was received,” said a colleague of Mr Xu’s who asked not to be identified.

Under China’s opaque legal system, it is unclear whether Mr Xu will be prosecuted. But his formal arrest makes it more likely that he will go to trial. As a leading proponent of legal reform in China, his case could serve as a test for how committed Beijing is to continue developing the rule of law.

Mr Xu was taken away from his home at dawn on July 29 shortly after the government closed down the Open Constitution Initiative, a non-governmental group co-founded and run by him which provides legal assistance in public interest cases.

The centre was closed after the authorities fined the group Rmb1.4m, saying it had failed to pay its taxes. Mr Xu’s detention came a day before he was due for a hearing on that case.

Mr Xu became widely known in 2003 when he campaigned against China’s extralegal detention of people staying in a city they lack a residential permit for. Mr Xu called upon the National People’s Congress, China’s parliament, to check whether the system was constitutional after Sun Zhigang, a university graduate, died following a beating while in police custody. Later that year, that form of detention was abolished.

Since then, Mr Xu has taken on numerous public interest cases. Most recently, his centre’s lawyers represented parents of children who died or fell ill after consuming melamine-tainted milk powder.

If found guilty of tax evasion, Mr Xu could face a sentence of up to seven years. Lawyers working with the centre said the tax evasion charges were part of Beijing’s broader attempt to harass activist lawyers and legal aid groups.

Open Constitution was set up as a company because aid groups that try to register as nonprofits often face insurmountable administrative hurdles in China. However, the alternative exposes them to government demands to declare tax as a for-profit business.

Earlier this month, centre organizers called for public donations and tried to settle the fine. However, they said this proved difficult because tax authorities refused to issue necessary paperwork and the bank accounts of the centre and Mr Xu were frozen.

Mr Zhou said he was allowed to visit Mr Xu late last week in a Beijing detention facility where Mr Xu remained as of Tuesday.

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Developed markets feel the impact of China tremors

By JohnTian | Published: 2009/08/19

When the US sneezes, the rest of the world catches a cold – or so the old saying goes.

But in recent days it has been the sickly Chinese stock market that has been blamed for infecting markets in other parts of the world.

Take yesterday – the Shanghai Composite index fell 4.3 per cent. Other Asian markets dropped sharply and bourses in Europe initially followed suit before recovering later.

David Morrison, market strategist at GFT, says: “We have put so much emphasis on Chinese growth and this bizarre notion that this will pull the rest of the world up with it, that when cracks begin to show traders start to worry.

“The increasing wariness over the accuracy of Chinese data, and concerns that stock and property bubbles have resulted from government stimulus ‘misallocation’, have got us all turning to the Shanghai Composite each morning in a way we would never have done even a month ago.”

Fraser Howie, the Singapore-based author of Privatising China who closely follows the Shanghai markets, adds: “China’s markets have become much more influential and correlated with other markets, not just in Asia but all over the world.

“This is because China is the only big economy in the world that is growing strongly. It is contributing more to world gross domestic product than before, so its markets have become more important to investors.”

This is a change because for many years the performance of Chinese and western equities was not correlated. There were good reasons for this, including the relative isolation of the Chinese market. It is very hard, for example, for western investors to buy Chinese A shares, as opposed to H shares which are traded in Hong Kong and which can be bought by foreigners.

Analysts say there have been a number of occasions in the past two years when falls in Chinese equities have sent tremors through other markets. One was on February 26 2007, when the Chinese market fell almost 9 per cent. But the opposite is also true. Last November Chinese markets began to recover following the announcement of the country’s massive $568bn stimulus programme, which presaged the recovery in western markets.

Since January 2008, the Shanghai Composite has moved in the same direction as the S&P 500 on 16 out of 20 months – a correlation of 80 per cent. Between January 2002 and December 2007, it moved in the same direction in 37 out of 84 months – a correlation of only 45 per cent.

The correlation is even greater between China and other Asian markets, with the Shanghai Composite moving in the same direction as the FTSE Asia Pacific index on 17 out of the past 20 months – an 85 per cent correlation.

But it is not just equities that have been influenced by China’s stock markets.

As Chinese equities have become a barometer for risk appetite, they have increasingly helped move currency and commodity markets. Both commodity and emerging market currencies, such as the South African rand and the Brazilian real, often take their cue from Chinese equities. Steve Barrow, a currencies strategist at Standard Bank, says: “It is our view that a sustained and serious bout of global risk aversion is only likely to come from China, not elsewhere.” However, China is not about to take over from the US as the benchmark market.

In fact, analysts warn that putting too much faith in Chinese equities as a bellwether would be foolish as they are closed to foreign investors, and consequently not such a good indicator of sentiment as open markets. They are also still very small compared with the developed exchanges in the US and Europe. For example, the US markets make up 41 per cent of the market capitalisation of the FTSE All World index. China only makes up 1.48 per cent.

Robert Buckland, equity strategist at Citigroup, says: “China’s economy is very important, but we are less convinced that Chinese stocks matter as much. Recent falls in stocks have been about investors looking for an excuse to take profits rather than really thinking the fall in China will start a sustained downward trend.

“Chinese markets are just not mature or big enough to displace the S&P 500. Maybe they will be in a few decades, but not yet.”

Mr Howie agrees: “It makes no sense for investors to follow the Chinese markets. They are very immature in that they do not have a large pension fund market or a solid base of investors like those in the west.

“They went up more than 90 per cent at one point this year, but that was artificial as money has found its way into stocks because of the huge amount of credit that has been made available by the banks at the behest of the authorities. This is a market driven by liquidity.”

Nigel Rendell, senior emerging market strategist at RBC Capital Markets, says: “China is now in effect in a bear market [a 20 per cent fall from recent peak to trough]. This has happened in just two weeks, so we have to be at least a little concerned.

“But we don’t think the market will necessarily fall a lot further. If you look at valuations, then the market looks fairly priced. Trailing price earnings multiples on the Shanghai Composite rose to 51.99 in October 2007. They are now 29.78. That is encouraging because if China falters, then the world recovery will do too. China’s markets may have not replaced the US just yet, but they are a big factor in determining sentiment.”

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Stocks Fall as China Slumps; Commodities Drop, Yen, Bonds Rise

By JohnTian | Published: 2009/08/19

China’s stocks dropped, briefly dragging the benchmark index into a so-called bear market and triggering declines in equities and commodities worldwide. The yen and Treasuries rose as investors sought less risky assets.

The MSCI World Index of 23 developed nations sank 0.3 percent at 12:45 p.m. in London and futures on the Standard & Poor’s 500 Index slid 0.8 percent. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. Copper fell 2.1 percent. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg and the pound weakened. The 10-year Treasury yield dropped to its lowest level since July 14.

The U.S. and Chinese governments pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg. Earnings for Chinese companies that reported since July 8 have trailed analysts’ estimates by 12 percent on average, Bloomberg data show.

“The focus of global markets is what’s happening in China,” said Bartosz Pawlowski, a London-based emerging-markets strategist at BNP Paribas SA. “China will have to remove liquidity from the market, and it’s likely that commodities will suffer and it means worse sentiment towards risk in general.”

Declining Loans

The Shanghai Composite lost 4.3 percent today as Maanshan Iron & Steel Co.tumbled 7.5 percent. The company posted a half- year loss for the second consecutive period as the global recession curbed demand from homebuilders and automakers.

The Shanghai gauge stands at less than half its record level in October 2007. Stocks have slumped as new loans in July declined to less than a quarter of June’s level and companies including Yunnan Copper Industry Co. reported losses. The gauge is still 53 percent higher for the full year.

China’s stock market has foreshadowed moves in global equities the past two years. It peaked on Oct. 16, 2007, two weeks before the MSCI All-Country World Index. The Shanghai index fell 72 percent from its 2007 high and bottomed on Nov. 4, 2008, four months before the MSCI index. The Chinese measure reached its 2009 high on Aug. 4, seven trading days before the global index.

The Dow Jones Stoxx 600 Index of European shares retreated 0.7 percent today. A 43 percent rebound since March 9 has driven the regional measure’s valuation to 40.2 times the profits of its companies, near the most expensive level since 2003, weekly data compiled by Bloomberg show.

Alcoa, Hewlett-Packard

Alcoa Inc., the largest U.S. aluminum producer, slid 3.6 percent in pre-market New York trading. Aluminum, copper, lead and nickel dropped in London and Goldman Sachs Group Inc. downgraded the company’s shares to “neutral” from “buy.”

Hewlett-Packard Co. slipped 2.4 percent in pre-market New York trading after the company’s fourth-quarter revenue forecast indicated that lower computer prices are eating into sales.

Revenue this quarter will grow about 8 percent from the previous three months, Hewlett-Packard said yesterday, suggesting sales of about $29.6 billion. Analysts in a Bloomberg survey predicted $29.8 billion on average.

Deere & Co., the world’s largest maker of agricultural equipment, fluctuated between gains and losses after reporting results. The company posted third-quarter profit of 99 cents per share, beating the 56-cent average estimate of analysts surveyed by Bloomberg, while giving a forecast that implied it will have a near break-even fourth quarter. Analysts projected profit of 35 cents a share for the period.

Emerging Markets

The MSCI Emerging Markets Index dropped 0.6 percent. India’s Bombay Stock Exchange Sensitive Index lost 1.5 percent, while Indonesia’s Jakarta Composite index fell 2.5 percent. Hungary’s forint led declines in east European currencies against the euro as the tumble in Chinese shares prompted investors to sell emerging-market assets.

Copper for delivery in three months fell 2.1 percent to $5,950 a metric ton on the London Metal Exchange. Crude oil retreated 0.3 percent to $69 a barrel in New York. China is the world’s second-largest oil user.

Investors are concerned that governments and their central banks will struggle to withdraw stimulus packages that have eased the global economic recession. “Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” billionaire Warren Buffett said. Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

Treasuries, King, Cameron

Treasuries advanced as investors sought the relative safety of U.S. bonds, driving the yield on the 10-year note 7 basis points lower to 3.44 percent. The two-year yield dropped 5 basis points to 0.98 percent.

The Federal Reserve is scheduled to buy Treasuries due from February 2020 to February 2026 today, part of its plan to cap consumer borrowing costs, according to its Web site.

The yen strengthened most against the pound after minutes of the Bank of England’s Aug. 6 meeting showed Governor Mervyn King wanted a larger increase in the central bank’s asset- purchase program. The dollar rose versus all 16 major currencies tracked by Bloomberg except the yen.

The cost of hedging against losses on U.K. government debt rose to the highest in a month after David Cameron, the leader of the opposition Conservative Party, said high borrowing levels put the country at risk of default. Credit-default swaps tied to Britain rose 2 basis points to 62, according to CMA DataVision prices. That compares with contracts on Germany at 26.5 basis points and Portugal at 63.5 basis points, CMA prices show.

Mounting Debt

The U.K.’s debt burden is the highest since 1976, when it sought an emergency loan from the International Monetary Fund to keep up overseas payments. The Treasury said in April it will borrow 269 billion pounds ($440 billion) more than previously forecast as the recession cuts tax revenue.

Confidence in the world economy surged to a 22-month high in August on signs the first global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed last week.

The U.S. unemployment rate dropped in July for the first time since April 2008, data from the Labor Department showed this month. The Organization of Economic Cooperation and Development said today that the economies of its 30 members collectively stopped shrinking in the second quarter as Japan, France and Germany exited recession.

The cost of protecting corporate bonds from default jumped to the highest in a month, according to JPMorgan Chase & Co. prices for credit-default swaps. Contracts on the Markit iTraxx Europe index rose 3.25 basis points to 103.25, and the risk gauge has now climbed 23 percent since Aug. 10.

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Shanghai slides on policy fears

By JohnTian | Published: 2009/08/19

A sharp sell-off in Chinese shares in late Wednesday trading saw the benchmark Shanghai Composite close 4.3 per cent lower, putting it in sight of a bear market as speculation grew that the Beijing government would tighten its monetary policy.

The sudden loss of confidence in the Shanghai market after the midday break meant that most Asian indices reversed earlier gains prompted by an overnight US rally. The Chinese market had spearheaded a sharp drop in regional shares on Monday, when the Composite index fell 5.8 per cent.

On Wednesday, the index fell as much as 5.1 per cent at one point, technically falling into a bear market as it was more than 20 per cent lower than this year’s peak on August 4, when it reached 3,471.40. It recovered slightly to close at 2,785.50.

Traders in China said Wang Qishan, vice-premier, had held a meeting with the country’s main regulatory bodies on Tuesday as the government planned to rein in liquidity.

Beijing is thought to be concerned about illegal lending to property developers and banks are tightening control over the approval of mortgages. New lending in July was down sharply to Rmb355.9bn ($52bn) from Rmb1,530bn the previous month, raising fears that liquidity would disappear from the stock market.

Resource-related sectors led the decline in Shanghai, with mining shares down 6.8 per cent and metal companies losing 8 per cent on average. A number of steelmakers and base-metal companies are due to announce earnings later this week.

Late on Tuesday, Maanshan Iron & Steel, one of the largest-listed steel producers in China, had posted a first-half net loss of $795.4m, the second consecutive interim loss on slumping demand. The negative results have exacerbated investors’ fear that current commodity prices are not sustainable, particularly if bank lending continues to slow.

Jiangxi Copper was down 8.4 per cent to Rmb35.27 and Chinalco dropped 7.5 per cent to Rmb14.49.

Bank of Communications, the first of the country’s top banks to report, announced after the market close that first-half net profit rose to Rmb15.6bn from Rmb15.5bn a year earlier.

News that Shanghai stock prices had plunged sent other regional shares down in the afternoon. The Nikkei 255 lost 0.7 per cent in the hour before closing, taking the day’s loss to 0.8 per cent compared with the day before. The Hang Seng Index in Hong Kong lost 1.7 per cent, mostly in the afternoon, to close below the 20,000 mark.

Australia escaped the sell-off because its market closed before afternoon trading in China began.

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China goes house hunting to rev up economy

By JohnTian | Published: 2009/08/19

The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

China’s biggest listed property developer, Vanke (000002.SZ), lifted its housing starts target for this year by 45 percent, while its rival Poly Real Estate (600048.SS) said sales in January-July rose 143 percent from a year earlier.

On the ground, construction firms, big and small, are trying to meet the demand, last years’ downturn now a distant memory.

“It’s been a long time since we’ve had a day off. Several months, I think, though I can’t remember exactly,” said Zhang Minghui, owner of a small building company in Beijing.

“From late last year to early this year, we basically had nothing to do. Everybody was careful with their money because of the crisis and so projects got delayed.”

Zhang cut his staff to three in November but is now back up to a crew of 14.

The economic importance of the property sector in China is hard to overstate. Investment in residential housing accounted for about 10 percent of gross domestic product before a property boom turned to bust in 2008, roughly the same as the contribution from the country’s vaunted export factories.

The government’s first steps last year to revive the stalling Chinese economy were to offer tax cuts to encourage home purchases, followed by rules to ease access to mortgages.

These are bearing fruit.

With housing investment up an annual 11.6 percent in the first seven months, Chinese growth momentum is broadening out and the central government has been able to slow the pace of its stimulus spending on infrastructure.

REAL ECONOMY

But Beijing must strike a fine balance in its bid to kick-start the housing market.

On the one hand, it wants rising prices to persuade house hunters to stop putting off purchases and to get developers to invest in new projects. On the other hand, it is wary of prices rising too quickly, luring speculators into the market and turning it into an asset bubble, not an economic driver.

“Because it is closely linked to so many industries, volatility in the real estate market will inevitably lead to macroeconomic volatility,” the government-run China Economic Times warned on Monday.

The housing market rebound in Beijing, Shenzhen, Guangzhou and other big cities means that prices are already back to their 2007 peak, the report noted.

While prices are high, a surge in sales has depleted housing inventories and developers need to break ground to catch up, Ken Peng, an economist at Citigroup in Beijing, said.

That the Chinese property sector is at a turning point, just getting back on its feet, is seen in the differing fortunes of shops at the Shilihe hardware market in east Beijing.

Those selling goods for early stages of construction, such as tiles, say business is strong. Vendors of lights, among the final purchases for a new home, say it is only now perking up.

“We have done some sales to attract shoppers. But we have actually started scaling these back,” said Chen Yu, a saleswoman at Jushang Lights.

UP OR DOWN?

The government can take heart in how most of the real estate money has been spent to date.

Investment in property construction was up a fifth in western China — the part of the country with the biggest need for new housing — in June compared with a year earlier. Wealthier coastal areas in the east, which are already heavily built up, saw a 4.4 percent rise.

But officials are wary of another boom in housing prices paving the way for yet another bust. A handful of Chinese cities have made mortgage lending terms on second homes stiffer to try to keep speculators at bay.

Several real estate agents said the market seemed to have cooled over the past few weeks.

Shanghai Xinyi, a real estate agency in China’s financial center, said transactions in August fell by half from July.

A salesman surnamed Luo at a Shenzhen branch of Centaline China confirmed that business has slowed down from its brisk pace in the first half.

“It was not rare for house sellers to cancel their original contracts and lift their asking price, even if it meant paying a penalty,” he said by phone. “But the momentum has weakened in August. We could feel the effect of the government’s tightening-up of loans for second homes.”

However, Dong Tao, an economist with Credit Suisse in Hong Kong, offered another explanation of the drop in transactions.

Soaring demand gobbled up whatever homes were on the market and so developers simply must build more, he said in a research note. But it takes time to buy land and obtain approvals.

“After many sites have passed the paperwork phase, we expect housing construction to rise significantly over the summer time.”

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