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Steady recovery expected to continue in Chinese residential property market

Prices nationwide are expected to rise around 10% between now and the end of 2010, according to a poll conducted by Reuters.

Property prices in bigger cities, where wealth levels and spending propensity are higher, will outperform second-tier cities with apartment prices in Shanghai, Shenzhen and Guangzhou set to rise by at least 10% in the next 18 months, the survey found.

It also shows that transactions are now clearly moving well. Home sales in first and second-tier cities have jumped more than 20% in the past three months, analysts say, after correcting in the second half of last year.

The market has been boosted by interest rate cuts and government measures such as stamp duty cuts and reduced mortgage down payment requirements, which are part of a broader economic stimulus plan.

'Policy is aimed at persuading people that property prices are not going to fall. The government is using property market reflation to boost economic growth. So it looks more likely that property prices will rise,' explained Paul Cavey, China economist at Macquarie Securities in Hong Kong.

Prices for some new developments in Shenzhen and other big cities are up 20 to 30% after being discounted by as much in the second half of last year after a property bubble burst.

However, average property prices in Chinese cities in May were up 0.6% from April, but down 0.6% from a year earlier, according to the National Development and Reform Commission.

The market is benefiting from excess liquidity in China but analysts say a repeat of the property bubble in 2007 which saw some Shanghai apartment prices soar 40 to 60% through 2007 and early 2008 is unlikely. At that time, the economy was growing by 13% annually and incomes followed suit.

This year the economy will be hard pressed to meet the government's 8% growth target. The World Bank forecasts 7.2% growth and that will make buyers cautious.

'Our immediate concern is that if prices go up too sharply before the economy recovers we could see a policy reversal and that could slow things down. The government wants steady property price gains. It doesn't want speculation,' said Nicole Wong, property analyst at CLSA.