The Chinese economy has been awash in liquidity due to government stimulus money and generous lending by state banks. Chinese officials are now concerned about an overheated economy and the inflationary pressures that come with that.

The fact that China’s economy has remained robust during the global recession gives Chinese officials leeway to rein in liquidity. The country has been growing at an average of 10 percent a year, and the strength of the export industry remains high despite a dip in late 2008, when the financial crisis first roiled the United States and then other parts of the world.

But investment in large capital-intensive projects has also been fueling the economic engine and driving up prices.

Analysts have been saying for months that they expect China to raise interest rates throughout 2011.

Earlier this month, the government reported that the consumer price index rose 5.1 percent in November, compared with the same period a year ago. It was the largest increase in three years. Since the spring, the year-on-year increase in the index has been above 3 percent, despite the government’s desire to keep the average increase below 3 percent for the entire year.

Chinese leaders are aware of the political dangers of high inflation. Xinhua, the state news agency, reported on Dec. 17 that Li Keqiang, the vice premier, said at a conference of government officials that “more efforts should be provided to stabilize prices next year.” He added that over the next five years, growth rates should be defined “reasonably.” Mr. Li is expected to take over as prime minister in 2012 from Wen Jiabao, who now oversees the economy.

Officials have signaled throughout the month that moves will be taken to better control spending across the country. China announced on Dec. 3 that it would tighten monetary policy next year, shifting it from “relatively loose to prudent.” That was a clear sign that Chinese officials were intensely concerned about inflation.

On Dec. 15, the Chinese Academy of Social Sciences, a prominent research organization based in Beijing, reported that high inflation and housing prices had contributed to a deepening sense of popular disaffection. The findings of the report were based on a survey of 4,143 people.

Commodity prices were the main concern of urban residents, followed by health care and housing prices, according to the findings, which were reported by Xinhua. Rural residents in this year’s survey said health care was their top concern, followed by commodity prices.

Job satisfaction among those surveyed was at its lowest in four years, according to the academy.

Also on Dec. 15, the central bank said that satisfaction among people with the current level of prices had dropped to an 11-year low. The bank’s findings were based on a survey of 20,000 people during the fourth quarter in 50 cities across China.

The real estate market is another concern. The property market in China has been booming. Rising property prices, along with the government stimulus money and loose bank lending, have spurred new developments across the country. Even long-term residents on the tropical southern island of Hainan have had to grapple with soaring real estate prices from outsiders coming in to buy up land.

Some analysts say this growth has resulted in a gargantuan bubble in the real estate market, while others argue that the capacity will be put to good use.

A record $560 billion of residential property was sold in 2009, an increase of 80 percent over 2008, according to government statistics.

In October, the government increased its benchmark lending rate, in what appeared to be an effort to tamp down real estate speculation.

Until now, low wages have helped to hold down inflation and keep China’s export industry competitive. But those wages in the context of soaring real estate prices mean that migrant workers from the interior of China are becoming less tolerant of poor work conditions on the coasts, where many of China’s export manufacturing factories are located. Many workers are now choosing to stay closer to home in the interior provinces, and some companies are moving their manufacturing centers inland.

China has ordered a further clampdown on excessive bank lending to ensure credit has not illegally entered the stock or property markets as two surveys on Monday showed the mounting challenges faced by policymakers.

China made a strong start to the year, according to January purchasing manager indexes (PMIs) that showed the economy runs a greater risk of growing too quickly, not too slowly, with rising input and output prices pointing to greater inflationary pressures.

Worries that the government, emboldened by the robust growth and wary of price pressures, will act more aggressively to tighten monetary conditions weighed on the benchmark Shanghai Composite Index, which fell to its lowest close in more than three months.

“If more forceful measures are not implemented to control credit expansion, we will likely see considerable upside risks” Yu Song and Helen Qiao, Goldman Sachs economists in Hong Kong, said in a note.

Authorities ordered banks to slow, and in some cases, to halt loan approvals for the rest of January to try to control unruly lenders which provided 1.1-trillion yuan in credit, or 15% of the full-year target, in the first two weeks of the month.

In the latest move, the China Banking Regulatory Commission (CBRC) ordered lenders to conduct checks on whether any loans had been used for improper purposes, a banking source told Reuters on Monday.

If so, the loans must be withdrawn within a certain period, said the source, who had seen the relevant notice from the regulator. He did not want to be identified.

But for all the tremors that the government’s gradual tightening has provoked in global markets, China’s two PMIs for January showed an economy that is growing strongly.

The official PMI eased from a 20-month high in December but remained firmly in expansionary territory, while an index derived from a companion poll by HSBC scaled an all-time high.

The reports, which are important leading indicators, both offered evidence of increasing cost pressures.

“Industrial activity continues to accelerate, implying stronger GDP growth in the first quarter. But rising input and output prices also point to greater inflationary pressure, which will likely prompt more tightening measures in the coming months” said Qu Hongbin, chief economist for China at HSBC.

China might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25%, Ba Shusong, a prominent government adviser, told Reuters. Consumer prices rose 1.9% in the year to December.

POLICY UNCERTAINTY

But in an illustration of the uncertainty surrounding Chinese policy at this juncture, a central bank researcher suggested that tightening could take the form of stiffer reserve requirements rather than higher interest rates.

A half-point increase in required reserves that took effect on Jan. 18 locked up 300-billion yuan. World markets tumbled in response to the tightening, which occurred much earlier than investors had expected.

“Whether China will increase interest rates or not will be decided by the price situation, and prices in the first quarter won’t be too high” Jiao Jinpu, deputy head of the central bank’s postgraduate school, told the official China Securities Journal.

In a sign of China’s ability to also use more direct administrative controls, official media reported that there had been a sharp slowdown in lending in the last 10 days of January after regulators ordered banks to pull in their horns.

Banks loaned 1.1-trillion yuan in the first half of January, according to bankers familiar with the central bank; by Jan. 19, the total had reached 1.45-trillion yuan, local media reported.

But for the whole of January net new lending was less than 1.6-trillion yuan (US$234 billion), the official Economic Information Daily reported, without giving its source. The People’s Bank of China releases official data next week.

Beijing’s loan quota for all of 2010 is 7.5-trillion yuan.

Until recently, Chinese policymakers had bent all their efforts on pulling the world’s third-largest economy out of a downturn induced by the global financial crisis.

The message from Monday’s surveys of purchasing managers was that, with the economy now back at cruising speed after growing 10.7% in the fourth quarter from a year earlier, Beijing is now justified in paying more attention to rising prices.

Nevertheless, Fan Gang, an adviser on the central bank’s monetary policy committee, sounded an optimistic note on inflation, saying that manufacturing over-capacity and an ample food supply would restrain price pressures.

The first time the five-year deposit interest rate increases 0.54
banks face earnings pressure
It is worth noting that this at the central bank announced that financial institutions in the five-year benchmark deposit interest rates 0.54 percentage points, and contrast, the five-year benchmark lending rate 0.09 percentage point hike alone. Personal housing accumulation fund the five-year loan rate was only 0.09 percentage points adjusted upwards accordingly.

In this regard, the Central Plains Analysis Securities researcher said, “This is the profitability of the mainland banking sector will constitute the new pressures. Prior to China’s deposit and lending rates increase in the basic, as adjusted and the bank to pay interest on deposits has improved significantly, while the lending interest rate to accelerate the decline in access. This has always been dependent on income spreads most commercial banks, will have a negative impact. “It is understood that this adjustment, the long-term deposit, loan spreads at 2.25, while the original rate of 2.7, reduced 0.45 points to reach 17% decline.

At the same time, Lyon, a researcher at that “interest rate increase the profitability of insurance companies for the mainland to form good, because the current structure of insurance assets ratio of more than 20% for bank deposits. Research data indicate that rising interest rates 0.27 basis points each, life insurance companies and other large stock price is expected to be up 5 percent support. ”

Short-term lending rates higher than long-term
curb excessive speculation
At the same time, the adjustment of short-term Loan interest rates range, significantly higher than long-term. Galaxy Securities analyst Gao Xiaofeng analysis, “the original short-term lending rates relatively low, since the first quarter of this year, subject to hot pursuit, this part of the funds into the stock market. The encounter marked increase, which would lead banks to tighten short-term loans due in order to market liquidity will gradually shrink, but it also requires a process will have obvious market reaction. ”

Foreign exchange transactions to expand the fluctuation range of
to accelerate the appreciation of the yuan will steadily the same day, the central bank also announced that, since 5 21 from the date of the inter-bank spot foreign exchange market, the yuan to float against the U.S. dollar trading price ranged from 3/1000 expanded to 5/1000. The industry that this will push to accelerate the appreciation of the yuan steady.

economists that the “slightly accelerated appreciation of the RMB to the Mainland’s imports and exports in some sectors, such as the negative impact will be increased, but the long term, beneficial to the economy as a whole rose. ”

Long-term loans to small increase in interest rates
mortgage burden of the public do not public concern for real estate loans , high Xiaofeng believes the long-term lending rates had only about one-third of previous rate increases, showing the central bank reluctant to increase the repayment burden on home buyers. Mr. Sun public rough calculations on this account, told reporters that “The interest rate increase after the increase in the monthly mortgage repayment amount to about tens of dollars a year for several hundred dollars more than the calendar year after the rate hike repayment increase significantly less, so the pressure is not, you can afford.”

“It’s very much a mixed bag,” says Jane Niven, regional general counsel for Jones Lang LaSalle. “You have Singapore, Hong Kong and India, which follow a common law based on the English system, as well as French and German influences elsewhere in Southeast Asia, an Australian system (Torrens), which has been adopted in some countries, and of course heavily regulated systems in Communist China and Vietnam.

“India is a title-based system, but it operates within such a corrupt environment that there are no guarantees of land ownership. People can claim an interest in property, even if they don’t have an interest, and they can tie it up in court for years and years, frustrating a legitimate owner’s ability to deal with that land for years at a time.

“There has been quite a lot of change in Malaysia, where there’s a recognition of the need to improve the private land situation, particularly with regard to foreign investment. “And many of these countries – Indonesia, the Philippines, Malaysia – will put legislation out for consideration which can take 18 months, two years, even up to five years to be passed.”

And yet, if Asian property law development has a common denominator, Niven contends, it is a reticence to encourage foreign ownership. This is an area that her team spends a good deal of time monitoring.

“Unquestionably, it’s one of the driving factors. You see it in places like Indonesia, changes to the laws in Thailand, particularly company laws which this year have made it more difficult for foreign corporations to operate and own property,” Niven says.

“Even in China, although they’ve introduced legislation to free up private ownership, they’ve actually made it much more difficult for foreign entities to own property, and that is an attempt to slow down the economy more than prevent foreigners from owning land.”

But just as regulation can restrict foreign investment, it can also encourage it. “Malaysia has changed some rules regarding foreign ownership to try and increase the amount of foreign investment in the country. They’re doing it in a limited way by defining areas ripe for development,” Niven says.

Still, she maintains: “Across the board, if you look at one thing Asian nations have pretty much in common is trying to keep the foreigners out. We’re always looking at the issue of foreign ownership and the issues around this. First is the economy and whether foreign ownership is used to drive the economy or slow it down via regulatory restrictions. [Generally] there’s been a tightening of foreign investment laws, although some would say they are more clarifications. But there’s no question that a lot of the governments are looking at foreign investors and how they invest, and are tightening their rules, and that eventually leads to land ownership issues, because foreign entities can’t come into a country unless it’s via a local owner.”

Niven puts forward one of Asia’s most progressive cities as an example. “Even in Singapore, to a certain extent, the vast majority of commercial land is owned by the government or government-controlled organizations. There are a lot of leasehold properties, some for 999 years, some 99 years. Even residential condominiums are on leasehold land.

“Where you’ve got freehold land, there are restrictions on foreign ownership. If you are just in Singapore on a work visa you can’t own what they call landed properties. You can only become a landed property owner if you become a permanent resident.”

Niven says this desire to keep foreign ownership at arm’s length, in Singapore, for example, “comes from a desire of keeping it an Asian country and also wanting to be seen to be very independent. Also, if you allow foreigners to own too much, that restricts the amount of property available to the locals. It’s a very small island and they need to ensure the local population is adequately housed and that means retaining control of property.”

Singapore saw a number of regulatory changes in the past year, according to research published by Allens Arthur Robinson. It included some notable policy changes to the Property Fund Guidelines, the Central Provident Fund and the Land Titles (Strata) Bill, governing en-bloc sales. The legislation aims to provide additional safeguards and greater transparency for all owners involved in such sales.

Amendments to the Property Fund Guidelines focused on establishing measures to safeguard the interests of investors in real estate investment trusts (REITs); providing greater clarity and flexibility on investment guidelines; and rationalizing the guidelines where the compliance costs exceed the benefits.

Allens Arthur Robinson also reports that the Monetary Authority of Singapore will amend the Securities and Futures Act and relevant regulations in the next round of legislative amendments, to set up a licensing regime for REIT managers. It concludes: “the increased focus on disclosure, investment flexibility, reduction of compliance costs and supervision of REIT managers, should serve to advance Singapore’s position as one of the most developed REIT markets in the region”.

But in terms of regulatory changes in the past year, most of Asia has remained unremarkable. The two nations that stand out, Malaysia and China, do so much for the economic reasons that Niven describes.

The Property Right Law of the People’s Republic of China provides, for the first time, a unified definition for a property right and introduces the concept in China. It also expressly protects an individual’s property rights from infringement at the same level as state and collective rights, and affords specific protection for mining, mineral and other use rights. Allens Arthur Robinson research adds that the law is a landmark for China, where land cannot be privately owned. “Under the current framework, purchasers of residential and commercial real estate, as well as farmers, receive grants of lease for up to 70 years, with the underlying fee simply reverting to the state or the collective at the end of the term.” Allens Arthur Robinson also observes that it is unclear how many of the details of the law will be applied in practice. “Many of the provisions have been defined generally or are silent as to the mechanics of how they will operate. Therefore, much will depend on the detailed implementation guidelines that are to follow and subsequent interpretation by the courts.”

Kenny Suen, managing director of Vigers Asia Pacific, says that China is struggling to keep a lid on an overheating economy, which has been helped in no small part by property investment. To counter this, China has been working overtime. It has used both monetary and regulatory controls to cool the economy and shut out foreign investment.

Suen says that the cycle of tightening measures is still on track to cool down the overheated market, which the introduction of a series of monetary measures in the third quarter initiated. “The deposit-reserve ratio requirement was lifted by 50 basis points to 12.5%, effective from September 25. Meanwhile, both the one-year benchmark deposit rate and lending rate increased by 0.27% to 3.87% and 7.29% respectively. Besides, uplifting the cost of borrowing proved to be another core tightening measure. The People’s Bank of China and the China Banking Regulatory Commission jointly announced in September an increase in the mortgage costs for both commercial and second residential properties by raising the down-payment on second residential properties to at least 40% from 30%, and down-payment on commercial properties to at least 50% from 40%.”

The tighter lending standards were designed to put home-owners and buyers in a bind, “but the strong buying sentiment currently shows no sign of waning,” Suen says.

“In addition to monetary policy tightening, the central government has issued regulations to restrict foreigners buying properties since 2006,” he adds. “Following Beijing and Shanghai, the Shenzhen Municipal Bureau of Land Resources and Housing Management and the Shenzhen office of the State Administration of Foreign Exchange issued a joint notice in July 2007 to restrict foreigners from buying houses. Foreigners (excluding residents in Hong Kong, Macau and Taiwan) who have resided or studied in mainland China for less than a year are restricted from buying a residential property for their personal use. Meanwhile, foreigners (including residents in Hong Kong, Macau and Taiwan) are restricted to buying only one residential property for their personal use.”

Suen thinks that the tighter measures have not undermined investor confidence in Chinese residential property, even though the central government is likely to introduce stricter measures soon to moderate the continued acceleration of property capital values.

Developers also saw the full implementation of Land Appreciation Tax collections from February 1 2007. They will now have to pay land-use fees in a lump sum, rather than in instalments, from November 1; this is designed to dry up cash-flow. Foreign entities wanting to buy properties for investment can now only do so through a wholly foreign-owned mainland company, or a joint venture with a mainland firm. They must also pay at least 50% equity for projects worth over US$10 million. The Chinese State Administration of Foreign Exchange has banned foreign investors from borrowing offshore, to target foreign investors riding on lower offshore interest rates. Now forced to borrow domestically, they will find it difficult to fund projects after the central government has instructed its banks to rein in loans in this sector.

While China continues to fence itself in, Malaysia is showing the region another direction with property law reform, according to Darien Bradshaw, regional director for Colliers International. “The only major change I’ve seen recently which is real in terms of government guidelines is Malaysia, where capital gains tax was abolished on April 1 [2007],” he says. “In the pipeline there have been discussions, as I understand it, that stamp duty might be abolished as well.

“In Malaysia, as a foreigner you can buy a freehold property, get a loan of 70%, there’s no restrictions on money going in and out, and you can sell at any time during construction if you’re buying off the plan. I would rate it very close to the UK and New Zealand in terms of acquisition costs and disposal costs and the ability to get money in and out. Across the board, the Malaysian government has done more than any other government in Asia in terms of enabling foreigners to invest in their country.”

Aravindhran Balan, manager of the knowledge department of the Malaysian firm Jayadeep Hari & Jamil, agrees that there have been numerous changes and amendments to Malaysia’s property regime in the past 12 months, and that the abolition of capital gains tax was a big concession to all investors.

“Prior to April 1 2007, capital gains or profits arising from the disposal of property were subject to gains tax of up to 30% of the profit from the sale,” Aravindhran says. “An individual could claim exemption from real property gains tax for disposal of only one private residence in his lifetime. The taxable amount was based on the duration you held the property.”

Since November last year, the Malaysian government has also eased the guidelines for the purchase of residential properties by foreigners. Previously, it required the approval of the Foreign Investment Committee (FIC), a division under the federal government’s Economic Planning Unit, and the local State Authority.

“These processes consumed time and cost. Worse still was the fact that the applications could not be made concurrently because the State Authority would always require that the FIC Approval be obtained first as a prerequisite to its consideration,” Aravindhran says.

“In a nutshell, the new guidelines state that FIC approval is no longer required where a foreign national or permanent resident purchases a residential property exceeding RM250,000 (US$74,200) in value (the rules on residential properties below the value of RM250,000 remain unchanged); and also where the property is bought solely for the foreign purchaser’s own use and occupation only (not to be rented or leased out or purchased as investment).”

Aravindhran says that the changes and amendments to the legislative and regulatory outfit of property law in Malaysia are a step by the government to liberalize its legal regime, with the aim of reducing red tape and preventing the deterrence of foreign direct investment.

“I cannot comment on whether Malaysia is the most progressive nation with respect to its property laws compared to its neighbours, but it is evident that over the past year Malaysia is making strides in modifying its property laws to boost the property market and better safeguard the interest of purchasers, and even the sellers. There are definitely more changes expected to come, since Malaysia has only just begun its journey in reforming its property laws.”

Bradshaw says Malaysia is “the best example in the region of all the good things to do”. He lists Thailand as “the flip side”.

“For example if you’re buying a property off the plan, if you’re looking at any major new development, on a freehold basis developers can sell 49% of their projects overseas. But it’s very difficult to get finance, so you need to be a cash buyer.

“Where there’ve been misunderstandings is where the government has said they’re going to clamp down in terms of people buying villas that come with land. Really the only way you can do that is by setting up a local Thai company where, as a foreigner, you can only earn 49% of the shares in that company, which means you can only own on a leasehold basis.

“There have been a lot of misunderstandings about the differences between investing in units off the plan and buying a villa or house on a piece of land, and that has been further complicated because there’s an interim government and we don’t really know what the policies of the new government will be.”

John Howard, managing director of Tilleke and Gibbins International in Phuket, agrees that uncertainty in Thailand’s market stems from political realities.

“Thailand is waiting for an elected government in December, so don’t expect changes, if any, until next year,” he says. “Thailand will not open land acquisition to foreigners (presently possible only to a discrete category of approved investors), but it matters not, as the market accepts long-term leasehold and there is often no appreciable difference in price. Thailand may enhance the foreign freehold condominium quota.” Howard sees the region’s notables this year, apart from China and Malaysia, as Singapore, “which has opened up some land to foreign freehold purchase,” and Vietnam “which is talking about modernizing its land records and long-term leasehold laws”.

He says “the common thread” with Asian property is long-term leasehold, which is where it differs from other regions.

“Most other countries allow foreign ownership of land, sometimes with conditions. In those countries long-term leasehold is not common, although it exists in some parts of, for example, Europe, Australia, the UK and the US. In the more developed nations the law in effect guarantees the validity of a title. That is not the case in much of Asia, so a rigorous title due diligence is almost always indicated.”

Bradshaw also lists Vietnam as an area of potential interest. “There’s been a slight watering down of government policy to try and entice foreign investors into the market. For example, you only need a multiple-entry visa now for a period of three months as a prerequisite for buying property, but it’s still only on a 50-year leasehold basis, and it’s a still a grey area in terms of laws untested, but there has been some documentation from government.”

He concedes that foreign ownership in Asia is tightly controlled, but adds: “there have been changes in places like Macau with the deregulation of property there, so foreigners have been able to get a foothold into that market.”

Howard says leaseholds are the norm for the region and, despite some reforms, will probably remain that way. “By and large there are laws and they do govern property, but what property? Owning a building is generally allowed, but not the land on which it resides. As the building generally cannot be moved, it goes with the land. While some countries allow freehold ownership of land or apartments, for land, long-term leasehold is the reality in the region, with differences being in what types of leases can be taken, and how secure they are.”