EPTLocal governments are tied to one leg of a triangle between real estate developers, themselves, and local banks, all of which benefit from rising real estate prices (the developers most obviously; the government through rising GDP figures = political points; the banks through loan commissions). However once real estate prices begin to fall, they become a piece of muscle sandwiched in between the banks (which need to foreclose and extract loan payments) and the developers (which might just walk away--indeed much of their risk management would be irrational without the current and future implied levels of debt support--see the CNKI article). However, a fourth group--homebuyers--will be hurt by developers abandoning their projects since an unfinished apartment project has a much lower residual value than a home that is underwater.
Hence official reactions will be unclear but could have regional variations. Any variations would be different from the "official" central stance, and possibly vacillate over time as these competing interests jockey for their share of the pie.
One government action is certain, however. The release of the most recent batch of economic data has strengthened the Central Bank's hand vis-a-vis the GDP-focused regional apparatchiks. First, the numbers (courtesy of Bloomberg): http://www.bloomberg.com/apps/news?pid=20601087&sid=asqZE.UsivdE&pos=2
"Gross domestic product rose 10.7 percent from a year before" and "Consumer prices rose a more-than-forecast 1.9 percent in December from a year earlier, the second straight gain after nine declines. Producer prices climbed 1.7 percent, after declining for the previous 12 months, today’s report showed."
"Sales quickened in December on a year-earlier basis, climbing 17.5 percent, while industrial production increased at a slower pace of 18.5 percent, today’s report showed. Urban fixed-asset investment jumped 30.5 percent in 2009, the statistics bureau said."
As finance professor Michael Pettis writes on his blog: http://mpettis.com/2010/01/good-numbers-or-bad-numbers/
"Given the worrying stories about RMB 1 trillion credit growth in the first three weeks of January, and rumors (subsequently denied) that the CBRC told banks to stop lending for the rest of January, the jump in inflation will give the PBoC the ammunition it needs to press its case on monetary tightening. It has had a tough time making its case in the past, but inflation is something that worries everyone."
Since the PBOC is likely to begin reining in monetary stimulus, then it is possible that Chinese real estate prices may begin to fall as a result. If that happens, it will be an interesting natural experiment to watch how China reacts across the three aforementioned dimensions.
