China's racing real estate prices may keep rising, because economic cooling measures are limiting the new property supply, the central bank said last Tuesday.

That announcement highlighted an unwelcome side effect of the policies.

Some fine-tuning might be needed to alleviate such problems, the People's Bank of China (PBOC), the nation's central bank, said in its quarterly report on monetary policy.

The comments came amid other signs the authorities are uncomfortable with unintended results of their campaign to slow the too-rapid economic growth, even though they are maintaining their line they cannot yet ease measures such as lending restrictions.

"It's worth noting the mismatch between supply and demand could aggravate and push up property prices, because investment in property developments has slowed," the central bank said.

"We must pay a high degree of attention to property prices ... and adopt different policies in line with different situations."

PBOC officials did not elaborate. The report can be seen on the central bank's website, www.pbc.gov.cn.

The government has been trying to slow the economy to prevent its boom from becoming a speculative bubble that turns to a bust.

It has told banks not to lend so much money to property developers, to prevent them from pumping up general economic demand and to save the industry from building more structures than it can profitably sell.

But the government also dislikes rapid real estate inflation, which itself encourages speculation and makes housing expensive for ordinary families.

Average property prices in China's major cities in the year's second quarter were 10.4 per cent higher compared with the same period last year. They rose 7.7 per cent in the year through the first quarter, Xinhua News Agency reported last Monday.

Prices surged 21.4 per cent in China's financial hub of Shanghai between the second quarters of 2003 and 2004.

Property prices in Shanghai averaged 5,400 yuan (US$650) per square metre in the year's first half, the highest in the country and fuelled partly by expectations among foreign investors that China will revalue the yuan currency.

China Vanke Ltd, Shanghai Forte Land Co Ltd and China Overseas Land and Investment Ltd are some of the developers that have enjoyed rapid property price rises in recent years.

Government data last Tuesday for industrial production again showed the economy is responding to measures to bring it in for a soft landing.

But those measures have not had uniformly happy results. The government said recently that banks had cut too many businesses off from finance. That threatens to send some to the wall.

Meanwhile, economists said the measures are probably slowing the employment growth and the government needs to avoid widespread joblessness in the rapidly changing economy.

The government hopes to lower housing prices by encouraging developers to build low-cost units to meet demand from ordinary people. But analysts said higher costs had forced developers to raise prices.

"The government worries about a property bubble, but developers are keen to build high-end properties due to higher profit margins," said Zhu Jianfang, an economist at China Securities.

"They have to raise prices now as costs of land and funding have increased."

The property sector has boomed since 1998, when China scrapped a welfare housing system in which the state doled out free homes.

Outstanding bank loans to the property sector hit 2.1 trillion yuan (US$253 billion) at the end of June, up 36 per cent from a year earlier, the central bank said.

But the growth was 5.3 percentage points lower than that in the year to end-May.

Outstanding loans to property developers at the end of June were 16.1 billion yuan (US$1.94 billion) lower than at the end of May, the first monthly decline ever, the central bank said.

China's investment in property development topped 541 billion yuan (US$65.18 billion) in the first half, 28 per cent more than a year earlier, government data shows.

(Business Weekly August 18, 2004)