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Need for steady growth fuels China's addiction to land sales

Retail investors wary of markets steered by government's hand

SHANGHAI -- China's central and local governments are taking often drastic measures to prop up real estate and other markets, striving to maintain growth and keep much-needed revenue flowing in, but these steps have come at a price for residents and retail investors.

Up in arms

Nearly 10,000 people took to the thoroughfare of East Nanjing Road in Shanghai on the evening of June 11, demanding that the government protect the rights of residents of China's largest city.

Large-scale protests are a rare sight in this affluent metropolis. Only a few noteworthy examples over the past several years spring to mind, including anti-Japanese demonstrations in 2005 and 2012, as well as 2008 protests against the proposed extension of a magnetic levitation train amid environmental concerns.

This first mass protest in five years came in response to the Shanghai government tightening regulations on housing built on land sold for commercial use, effectively barring people from moving into such properties.

The reason for the abrupt crackdown remains unclear. The city may simply have intended to deal with the swelling gray market for such homes, but Shanghainese speculate that the government wanted to protect its revenue from land sales.

Selling land is an important source of income for local governments and helps to fund the infrastructure investment that plays a vital role in shoring up China's economy. Turning a blind eye to the practice of buying up cheaper commercial-zoned land, only to use it for more housing, could have threatened the golden goose.

It is not just local governments that depend on this model. The double-digit growth in Chinese consumer spending has been supported by a wealth effect created by soaring property values. The country now has a vested interest in encouraging real estate prices to keep rising.

Dozens of condominium buildings have cropped up in a development zone in Yantai, Shandong Province, overlooking the Bohai Sea. Yet few of the windows are illuminated even after the sun sets.

Developers claim that units have been sold but buyers have not moved in, or that investors have bought properties and are waiting for prices to go up. Even if these explanations are taken at face value, it is plain to see that these companies are feeding the market now at the expense of future demand. It is difficult to swallow the government line that new housing supply is being absorbed even outside the big cities.

Appearances deceive

The Shanghai Composite Index hit a year-to-date high early this month and is hovering around its highest level in 19 months. The inclusion of yuan-denominated A-shares in MSCI's Emerging Markets Index, along with the Chinese economy proving surprisingly robust, have fueled an influx of money from abroad.

But the retail investors who account for 80% of trading do not share this enthusiasm. Though the blue chips included in benchmark indexes are faring well, the small- and mid-cap stocks that individuals frequently trade remain top-heavy.

Investors sense that the government could be intentionally propping up stock prices, along with property values and the economy as a whole, ahead of the upcoming twice-a-decade Communist Party congress and the leadership reshuffle that takes place there. "It's best to stay out of stocks this year," confided an older investor encountered at a brokerage here.

Shanghai eventually gave up on its crackdown on commercial-titled housing after demonstrators started grumbling about receiving such poor treatment from a mayor who was just installed in January -- Ying Yong, a longtime aide to President Xi Jinping. The city may have sought to contain the damage before criticism spread to the Xi administration.

With the government putting economic and financial growth above all else ahead of the congress this fall, it remains impossible to tell whether stocks have really shaken off their long torpor.

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