China has blinked and made its first moves to cool the speculative forces ignited by its $US585 billion stimulus package announced 13 months ago.

At the same time, the government has made it clear that it will be trying harder to boost private consumption and not investment, especially in white goods and other family appliances, and in energy-efficient cars.

The stimulus, and especially the loan splurge it has set off, has fired up the Chinese stockmarket, the economy generally and especially demand for cars and for property and houses.

Now the government has taken aim at cooling speculation in property, curbing the growth in car sales and redirecting them to more efficient types if vehicles; there’s growing whispers that bank lending will be raised, but in reality cut, with a new upper limit strictly enforced. Can the stockmarket be far behind?

To move to curb car sales could dampen expectations of higher iron ore and coal sales to China next year, but the government is also trying to expand consumption of white goods and cars in rural areas, which could make up for any downturn in sales from tax changes.

With November’s economic figures due out later today and expected to show further sold growth in the economy, the country’s State Council has announced changes to tax breaks for some car purchases, and property purchases.

Car sales are soaring, up 100% or more in November (November last year saw a big fall in sales, so the size of the rise is a bit misleading), but urban property prices have broken upwards in the past three months, accelerating from no change to a rise of 5.9% in November in the country’s 70 largest urban areas.

China’s car sales jumped by more than 100% in November to 1.10 million, up 10.3% from November last year (when sales were falling sharply) and up 9.5% from October. It was the first time the domestic monthly production and sales broke the one million units barrier.

The stimulus package, which was due to expire at the end of this month, includes a 50% cut in the 10% purchase tax for cars with an engine capacity of, or less than, 1.6 litres and subsidies for trade-in cars. It will now be extended to the end of next year, but the purchase tax for smaller cars will be lifted from 5% to 7.5% of the total vehicle price next month. Expect that to trigger a surge in car sales, then a slump.

The State Council also decided this week to scrap a tax break on property sales. It will re-impose a sales tax on homes sold within five years after cutting the period to two years in December-January, to help the weakened property sector. That means home buyers will have to hold their houses for much longer to avoid the tax.

That was after property prices in the 70 major urban areas fell in the year to December, 2009 (the first on record) as the impact of the credit crunch and global recession rippled through China. Now prices have rebounded strong, while commercial property prices have enjoyed double-digit rises in some major cities, especially parts of Beijing.

It was the further acceleration in November, with a 5.7% (annual) jump from October’s rate that seems to have triggered the move by the government.

China will also pick five cities for trials of subsidies designed to encourage individuals to buy alternative energy and energy-efficient cars, such as hybrids. The State Council said the government will increase car trade-in subsidies to between 5000 yuan and 18,000 yuan for these vehicle types, and extend subsidies for purchases of automobiles, household appliances and farming equipment in rural areas.

That follows statements from the commerce ministry two weeks ago, which foreshadowed the move to boost consumption of white goods and other household appliances. China will continue appliance trade-in subsidies beyond May next year when they had been expected to end.

And with the 2009 bank loan limit of 5 trillion yuan, breached and expected to top out at 9.5 trillion by the end of this month, the move to lift the limit seems odd. But from scattered reports and comments, it seems the new limit of about 8 trillion, will in effect be a cut of probably 20% at most on the actual lending done this year.

The reports suggest the limit will be enforced and much of the commentaries on official websites talk about “flexibility” being introduced into policy making. Take that to read “don’t be surprised at interest rates rises and moves to force banks to add to their asset reserve ratios and bad debt provisions to curtail unchecked lending”.

Peter Fray

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