Allowing local governments to issue bonds will help cushion their reliance on capital from auction of land use rights, and solve the uncertainties of implementing the government stimulus package, Morgan Stanley's China strategist Lou Gang said on Wednesday.

He also pointed out that the timing for REIT (real estate investment trusts) introduction is good for the country in the long term, and said a trial in Shanghai may be announced before the program is extended nationwide.

But he warned that the government should set up an exit mechanism for small-and medium-sized realty developers.

Regarding recent pick-ups in property transactions, Lou said property developers are compromising to the market by cutting prices, which will lead to sliding profitability in the industry, and therefore make listed property developers have lower net profit expectations in 2009.

Lou noted that policies remain the driving force for China's stock market in 2009. And policy makers' ability to deal with deteriorating external and domestic demand and to balance the economy is crucial to the market recovery and China's sustainable growth in the long-term, although the 4 trillion yuan stimulus package has showed positive effects in some aspects.

(China Daily March 19, 2009)