Archive for the ‘yuan’ Category


World economy: The China cycle

By Geoff Dyer – FT.com
Published: September 12 2010 20:03 | Last updated: September 12 2010 20:03

China-brazil trade
Allied by alloys: a steel market in the Chinese privince of Hubei. As well as investing in fellow emerging nations’ commodities, such as Brazilian iron ore, Beijing is increasingly investing in their infrastructure

Deep in the Amazon jungle, huge chunks of red earth are torn out of the ground at Carajás, the biggest iron ore mine in the world, to be transported halfway round the globe to the steel mills on China’s eastern seaboard. There they are turned into the backbone for millions of tower blocks in hundreds of booming Chinese cities.

Last year, China overtook the US to become Brazil’s biggest trading partner. The two large developing countries may be on opposite sides of the planet but their growing economic ties over the past decade have become among the enduring symbols of shifts in the global economy.

The duo could also be forging a path for one of the potential biggest realignments in the global economy over the next decade. With little fanfare, China is likely to emerge as the biggest direct investor in Brazil this year, following a string of deals announced in mining, steel, construction equipment and electricity transmission.

Such investments are part of a slow-burning but hugely important trend. Newly crowned the second-largest economy, eclipsing Japan, China is becoming the anchor for a new cycle of self-sustaining economic development between Asia and the rest of the developing world – one that is bypassing the economies of Europe and the US.

China is not only sucking in raw materials from other developing economies, just as it has during the past decade. It has also begun making investments in infrastructure and industry in those countries, some of which are made possible by its cut-price and increasingly sophisticated manufacturing companies or by the attractive financing terms it can offer. Beijing has for some years been investing in this way in parts of Africa: now such deals are being rolled out around the world. For many developing countries, the impact of the China boom is coming full circle.

“It is the start of a new cycle,” says Ben Simpfendorfer, an economist at RBS and author of The New Silk Road, a book on the surging economic ties between China and the Middle East, central Asia and south Asia. “China has companies that are willing to invest, they have products that are good enough, and they are backed by abundant liquidity in the country’s financial system.”

BEIJING MEETS BRAZIL
Direct investment overseas by Chinese companies has increased from just $5.5bn in 2004 to $56.5bn last year. Chinese officials predicted last week that it would reach $100bn by 2013.

About 70 per cent of the money invested last year went to other parts of Asia. Latin America came in second place with 15 per cent.

Chinese companies have so far invested only very modestly in Brazil but Brazilian officials estimate that investment will exceed $10bn this year.

Chinese banks have lent $10bn to Petrobras, the Brazilian oil company, and $1.23bn to Vale, the iron ore miner.

Ian Bremmer, president of the Eurasia consultancy and author of the recent book, The End of The Free Market, says there is no accident to this China-led process of decoupling from the west. It is, he says, a strategy to reduce economic – and to some extent political – dependence on the US.

“It is a very conscious policy, on the top of the agenda for the entire Chinese leadership,” he says. “They are looking for a hedging strategy because they feel uncertain about the long-term economic prospects of the developed world.”

Promoting innovation and stimulating domestic consumption are also part of that strategy, he argues, but pushing stronger economic integration with the rest of the developing world is the “one strategy that can be done quite quickly”.

Nowhere is the impact of this process being felt more keenly than in Brazil.
As trade has boomed with China during the past decade, Brazilians have sometimes complained of being relegated once again to their 20th-century role of providing commodities to the industrial powers. In the past year, however, the long-awaited wave of Chinese investment in the country appears finally to have reached Brazil’s shores. While it reached only $92m in 2009, the country’s officials estimate that it will exceed $10bn this year.

Wuhan Iron and Steel, for instance, paid $400m for a stake in a mining company owned by Brazilian industrialist Eike Batista, and is planning to build a huge steel mill beside the port near Rio de Janeiro that another of Mr Batista’s companies is constructing. Lifan, one of China’s biggest manufacturers of motorcycles and cars, already exports heavily to Brazil. Now the company’s founder, Yin Mingshan, says it is considering opening a plant to build cars in the country. “Brazil is a very promising market, with a vast territory and a big domestic market,” he says. “Some Chinese businessmen are foolish enough to ignore doing business in Brazil but I am not that stupid.”

If investment in Brazil is one symbol of this new stage of economic Chinese engagement with the developing world, another is the flurry of new rail networks taking shape globally. Chinese railway construction companies are some of the most efficient anywhere, and have for several years been operating in neighbouring countries in central and south-east Asia. But in the past year they have also signed contracts in such diverse places as Ukraine, Turkey and Argentina.

China exports
Chinese companies in the sector have not restricted their activities to the manual task of laying rail lines. They are hoping to start signing overseas deals to sell high-speed rail equipment, including locomotives and signalling systems. The first customer could be the planned high-speed line between São Paulo and Rio de Janeiro.

There are two factors that have made these new links possible. The first is that China has produced a generation of companies making capital goods that are now internationally competitive. They can offer developing countries new trains, power stations, mining machinery and telecommunications equipment of sufficient quality at prices that are often well below those of their multinational competitors.

GLOBAL RENMINBI USE
‘It’s like a Formula One starting race, everyone jostling for position’
Although China is both the second- largest economy and the biggest exporter in the world, the renminbi is virtually unseen outside the country. For global transactions, China depends on foreign currencies – in particular the US dollar.
The perils of this arrangement became clear during the financial crisis, when China’s mighty export machine was hit by a freeze in dollar-denominated trade credit. So in recent months Beijing has unveiled measures to facilitate the use of the renminbi and reshape the global monetary system. “We’re at the beginning of something huge,” says Dariusz Kowalczyk, a Hong Kong-based strategist at Crédit Agricole. “Intermediation through the dollar will be gradually eliminated.”
In June, Beijing expanded the scope of a year-old pilot scheme for settling cross-border trades in renminbi, opening it up to the world. Global banks such as HSBC, Deutsche Bank and Citigroup have since been encouraging companies from London to Tokyo to use the Chinese currency rather than the dollar. Some even offer discounted transaction fees as an incentive. “It’s like a Formula One starting race – everyone’s jostling for position,” says Philippe Jaccard of Citigroup.
The financial infrastructure is now in place to allow an Argentinian grain producer, for example, to sell goods for renminbi then use the proceeds to buy farm machinery from China. Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year. But that figure remains tiny compared with the $2,800bn worth of goods and services traded across China’s borders last year, most of which was settled in dollars or euros.
One of the obstacles to greater global use of the renminbi is a lack of ways for foreign companies to invest their renminbi or hedge their exposure to the currency. Strict capital controls place China’s financial markets almost entirely off limits. But that is changing. Last month, China opened its domestic interbank bond market to foreign central banks and commercial banks that have accumulated renminbi through cross-border trade settlement. Curbs on the free flow of renminbi in Hong Kong have also been lifted. Since July, financial groups in the special administrative region have been able to create a range of renminbi-denominated investment products and hedging tools – all open to global companies and investors.
McDonald’s, the US fast-food chain, last month became the first foreign multinational to issue a renminbi-denominated bond in Hong Kong. It plans to use the proceeds to fund its operations on the Chinese mainland. Robert Cookson

The second element is the financial backing from a banking system that has been mobilised to follow behind these businesses. Yi Huiman, a senior executive at Industrial and Commercial Bank of China, told a conference recently that the institution was working with the government to provide “railroads plus finance” around the world. Vale, the Brazilian company that operates the giant iron ore mine in the Amazon, announced on Friday that it had signed a $1.23bn credit with two Chinese banks to finance the purchase of 12 huge cargo ships from a Chinese shipyard, which will transport iron ore between the two countries.

The scale of these transactions is clearly much smaller than Beijing’s holdings of US securities, estimated to be in the order of $1,500bn, but the underlying dynamic is the same: the Chinese financial system is starting to recycle some of its holdings of foreign currency into the economies of its developing country trading partners, in order to stimulate demand for its own goods.

The impact is already apparent in China’s trade statistics, with the biggest increases in exports in the past year coming from developing countries. Trade with the Association of Southeast Asian Nations increased by 54.7 per cent in the first half of the year, and by 60.3 per cent with Brazil.

If Chinese investment does indeed help to kick off a growth cycle in other parts of the developing world, it will be a tonic for a global economy in which the outlook for many leading economies remains subdued, with some even facing the risk of a double-dip recession. The combination of Chinese demand and booming investment is one reason for Brazil’s ability to record China-style growth rates of 8.9 per cent in the first half of the year.

Yet for western economies there are also plenty or risks involved. The investment push is likely to herald an era of intense competition between developed-world multinationals and state-owned Chinese companies. The strong financial backing that such groups receive is also likely to fuel accusations that they are not playing on a level field. It is perhaps no surprise that some of the multinationals that in recent months have publicly voiced criticisms of Beijing’s industrial policies – GE and Siemens – operate in sectors in which China is becoming a fierce competitor, such as power equipment and railways.

China’s new clout is also raising questions about the future of the dollar. Chinese officials have talked about a long-term goal of replacing it as the global reserve currency with a basket of others, potentially including the renminbi.

As trade with the developing world balloons, Beijing has also been taking important steps to expand the international use of the renminbi, including allowing overseas holdings of the currency to be invested in the onshore bond market. Some economists believe it could become the reference currency for Asian trade over the course of the next decade.
Yet the irony is that, while there is strong economic momentum behind the Chinese currency taking on a much larger international role, Beijing is reluctant to let this happen. “China is still very hesitant about whether it really wants the currency to be international,” says Yu Yongding, an influential economist at the Chinese Academy of Social Sciences think-tank.
To become an important trading currency is one thing: but to become a global reserve currency with the power to threaten the role of the dollar, the government would need to lower capital controls and open up its domestic bond market. This would mean giving up its tight control of exchange and interest rates.
Furthermore, if economic integration with other developing countries is really to take off, it will require careful management by Beijing. There is a very real risk that the new-found interest in emerging markets will provoke a backlash, especially if China’s exports of manufactured goods keep up such a rapid pace of growth.
There are already plenty of warning signs. India, for instance, has tried this year to reduce supplies of Chinese power equipment in favour of goods made by local producers. For several months, New Delhi blocked Huawei, the Chinese maker of telecoms equipment, from the Indian market.
In Brazil, there are fears that companies such as carmaker Lifan want to use the country to assemble kits of nearly-completed cars made in China rather than promote a domestic industry. There is also concern about fresh competition for access to markets elsewhere in Latin America. Kevin Gallagher of Boston University calculates that 91 per cent of Brazilian exports of manufactured goods to the region are under threat from lower-priced Chinese products. If that market wilts away, industry is likely to become much more critical of the new China ties.
China’s growing links with the rest of the developing world could provide a huge boost both to the country itself and to the global economy during the course of the next decade. But a wave of protectionism could yet halt the process. Beijing will need to work hard to ensure its new partners in the developing world do not feel steamrollered by the Chinese juggernaut.


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U.S. Lawmakers Gear Up to Seek New Yuan Policy

WASHINGTON—The U.S. trade deficit with China in June hit its highest level in nearly two years and could spur congressional pressure on Beijing to revamp its currency policy.

America’s trade deficit with China jumped 17% in June over the previous month to $26.2 billion, the biggest gap since October 2008. Earlier this week, China said its overall trade surplus hit $28.7 billion in July, an 18-month high.

Associated Press

A production line in Guangdong province, in southern China, in May.

The Commerce Department figures could set the stage for a fight in Congress this fall over China’s currency policy. Some lawmakers, arguing that China has set the yuan artificially low to make its exports more price competitive on global markets, are keen to pass laws that would penalize countries that are found to be manipulating their currencies.

China, under pressure from the U.S. and other countries, announced a shift to a more-flexible exchange rate in June. But the yuan has appreciated less than 1% since then, and some economists say that it remains undervalued against the dollar by at least 25%.

While efforts to pass such legislation have made little headway, lawmakers and industry groups agree that the issue could gain traction in September, given that voters, who head to the polls in November, are angry about the country’s continued weak economy and high unemployment rate.

A number of bills have garnered bipartisan support, including measures promoted by Tim Ryan (D., Ohio) and Patrick Murphy (D., Pa.) in the House, and by Charles Schumer (D., N.Y.) in the Senate.

These efforts would, among other things, make it easier for companies to seek import duties on goods from countries designated as having undervalued currencies. The Ryan-Murphy bill has more than 127 co-sponsors, including 37 Republicans.

Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi (D., Calif.), said the House Ways and Means Committee would hold a hearing on the currency issue in September after Congress returns from summer recess.

“But no final decisions have been made on moving legislation forward,” he said.

Sen. Sherrod Brown (D., Ohio), a co-sponsor of the Schumer bill and a member of President Barack Obama’s Export Council, wrote Mr. Obama on Aug. 4, urging the administration to take tougher measures to address “unfairly subsidized exports” by countries such as China. Ten other senators signed the letter, including Republicans Jim Bunning of Kentucky and Olympia Snowe of Maine.

The Treasury Department on Wednesday declined to comment on the U.S.-China trade gap or China’s currency policy.

Business groups are expected to intensify their lobbying on the issue, although they differ over whether punitive legislation aimed at China’s currency policy is the best solution for narrowing the U.S.-China trade gap.

Augustine Tantillo, executive director of the American Manufacturing Trade Action Coalition, a Washington trade group representing U.S. manufacturers, says the group backs the Ryan-Murphy bill and is lobbying lawmakers, targeting those from Midwestern and Southeastern states with large manufacturing sectors and high unemployment.

“These trade surpluses aren’t a result of happenstance,” he said. “We’re hoping concerns about job creation and the fall election environment will finally give us an opportunity to bring the legislation to a vote.”

Erin Ennis, vice president for the U.S.-China Business Council, which represents U.S. companies doing business in China, said the window for China to “show it was serious” about addressing U.S. concerns about the yuan would close in September, when Congress returns to session.

But while Ms. Ennis expected the Chinese currency policy to be a major issue in the fall, “this isn’t our member companies’ top priority,” she said.

Rather, she said that Congress and the administration should focus on reducing barriers to China’s market and on the country’s new “indigenous innovation” policy, which many Western companies say unfairly favors Chinese companies by promoting domestic innovation.
Write to Kathy Chen at kathy.chen@wsj.com

U.S.-China Trade Gap Stirs Lawmakers – WSJ.com

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CAIXIN ONLINE
Aug. 3, 2010, 8:30 p.m. EDT

Fear empty flats in China’s property bubble

Commentary: Even worse than price bubble is quantity bubble of vacant flats

By Andy Xie
BEIJING (Caixin Online) — How many flats in China are sitting empty? The media recently floated a story — denied by power companies — that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people.
Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation’s unused apartment stock is perhaps the most important measure of the extent and seriousness of China’s property-market bubble. Indeed, it’s a grave concern for policy making, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market.
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Real estate is prone to price bubbles because unique factors restrict its supply response. Inflated prices have been the mark of most modern-day property bubbles. Price bubbles occur frequently and can last a long time.
In the 1980s, Tokyo saw a tremendous rise in property prices not in tandem with supply. The Hong Kong property market experienced a similar phenomenon in the 1990s.
One reason for limited supply is that property development is subject to government regulations, especially local rules. Established communities usually restrict building heights and density, for example, making it virtually impossible for mature communities to increase supply quickly. London, which is now experiencing a price bubble, and Tokyo in the past are cities that tightly control building heights.
Second, infrastructure development takes time and is always relative to land availability. Even in an island-city such as Singapore, land can be reclaimed from the sea at low costs, pointing to the correlation between land and infrastructure. But when property prices are high, and even when money is available for infrastructure development, one should be cautious about plunging in for fear that property prices could later fall. Thus, even over extended periods of time, property supplies may not respond to price increases.
Hong Kong doesn’t have height restrictions like London or Tokyo. Nor does it have infrastructure or land shortages. But a government policy limiting land supply created scarcity before 1997, setting the stage for a bubble. The subsequent catalysts for higher prices were loose monetary conditions imported from the United States through Hong Kong’s currency peg to the dollar. Even though prices were rising, the government chose not to increase supply, leading to a price bubble.
Thus, demand for property also rises under eased monetary conditions, and climbing price momentum attracts speculative demand. If monetary conditions remain loose for a while, credit access can sustain this kind of speculative demand. This points to a need for the Chinese government to adjust its property-market policies as well as interest rates to reduce speculation and steer the market out of a looming bubble crisis.
It’s been said many times that China is experiencing a nationwide urban property price bubble. High prices in major cities where most of the country’s property value is concentrated cannot be explained rationally.
Rising rents are a little easier to explain, however, even in the face of empty flats everywhere. Some blame intermediaries for ramping up the market, but this explanation is hard to stick in China’s fragmented intermediary real-estate industry. Instead, inflation expectation is probably driving current rent increases: Property owners anticipate spending more in the future remodeling flats to compensate for renter wear-and-tear, so they charge higher rents now to plan for higher costs.

Quantity pump

What especially distinguishes China’s property bubble, however, is an unprecedented amount of living space. This huge stock of empty flats equals the nation’s quantity bubble.
Quantity bubbles are less common than price bubbles, and they don’t last as long. Rising supply usually exerts downward pressure on prices, although an influx of money can hold up prices even when supply is rising.
A price bubble can damage an economy in three ways. First, it usually leads to a banking crisis. As the market trades at ever-higher prices, buyers borrow more against the same property. Banks that maintain the same lending cushion with, say, a 30% down-payment rule suffer losses when prices fall below that level. A banking system in crisis cannot lend normally, and the economy suffers collateral damage due to dysfunctional banking.
Second, the wealth effect leads to excessive consumption during a bubble. The payback weakens an economy for several years.
And third, bubble-induced demand distorts the supply side. When inflated industries go down with a bubble burst, it takes time for other industries to rise in an economy in their place.
A quantity bubble is sometimes a construction bubble, and it fizzles out when a building cycle turns over, crashing prices as soon as new supply becomes available. This is what happened to a commercial property bubble in the United States in the late 1980s, triggering a bank crisis when it burst and prompting the Federal Reserve to maintain a loose monetary policy that helped the banking system heal.
Quantity and price bubbles may grow together. Southeast Asia, for example, experienced a quantity-cum-price bubble that lasted several years in the 1990s. As regional currencies were pegged to the dollar, loose monetary conditions were imported from the United States, fueling a property bubble. Due to few restrictions on urban development, rising prices led to massive increases in supply. Liquidity inflow fueled speculative demand. But when U.S. monetary policy tightened, the market crashed and triggered the Asian Financial Crisis.
The latest experience in the U.S. market was mainly based on a price bubble, although some cities such as Las Vegas and Miami saw quantity bubbles as well. The U.S. government quickly recapitalized its banking system, limiting the direct effect of the banking crisis on the economy. Current weakness can be explained mainly by the wealth effect and employment losses in bubble-inflated industries.
When Taiwan experienced a price-cum-quantity bubble in the late 1980s, analysts determined the number of empty flats by obtaining electricity meter data from the power supplier, leading many to conclude that about 15% of all flats were empty. Today, some analysts are trying the same tactic in China. But Taiwan’s housing conditions are less complex. Getting to the core of China’s data requires more calculating.
Housing types, for example, must be considered. China’s urban housing stock is mainly split between old, public housing built for company or government employees, and some 60 million units of private housing built over the past 10 years. Property developers are now building about 20 million private flats, and local government-owned land banks may be good for another 20 million to 30 million.
About 1 billion square meters worth of public housing (or about 14 million, 70-square-meter units) have been torn down, leaving about 9 billion square meters of this type of living space nationwide.
Moreover, companies and government agencies are still building apartments for employees. This practice has slowed but remains significant in many cities even today. It’s hard to tell how many of these newer flats are out there.
There are similar unknowns about dormitories, such as factory dormitories that house workers from rural areas who migrate to manufacturing regions. Most of China’s more than 200 million migrant workers may be living in such dormitories.
Not all commercial property is market-driven, since certain people with connections or other advantages may own rental apartments that tend to have high vacancy rates and should be taken into account when calculating market excess.
Another consideration is that massive quantities of housing have been springing up in rural communities near major cities. And when farmland is rezoned for urban development, the region’s housing starts falling into the urban category.

Numbers crunching

Although China’s new property sales topped 14% of GDP in 2009, the data is confusing. Maybe it’s confusing by design, since firm figures on total urban housing stock are hard to find. My guesstimate is that China’s total urban stock is around 17 billion square meters, plus or minus 10%.
One useful figure for analysts is China’s living space per capita. Surveys in most cities suggest the average living space is between 28 and 30 square meters per person. We don’t know which population segment these surveys cover; they certainly don’t include migrant workers. And we don’t know if empty flats are counted.
Based on this limited data, however, we can confidently conclude that China does not have a housing shortage. Moreover, its per-capita living space is higher than in Europe and Japan. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for every man, woman and child in the country.
Far more important than general data, however, are the housing figures pointing to a huge quantity of empty flats apparently being held only for speculation.
In a normal market, the vacancy rate should be equal to the number of households relocating, times the average transition period, plus newly formed households times the average purchase period. For example, a vacancy rate of 1.5% could accommodate a market in which 6% of households relocate every year, and the transit time is three months. If new household formation is 3%, and the average period for a property purchase is six months, this factor requires a vacancy rate of another 1.5%. The total normal vacancy rate should be 3%. This figure includes the new properties ready for sale.
Although the government doesn’t publish vacancy data, I think the vacancy rate for the nation’s private, commercial housing stock is between 25% and 30%. That’s at least double what’s required in a normal market. The gap between what’s needed and what’s available can be viewed as speculative inventory. The value of this inventory held by speculators is probably around 15% of GDP. It’s being kept on ice, just as copper and other commodities are hoarded in anticipation of rising prices.

Watch out

We should fear China’s quantity bubble. And we should be terrified by the potential for a massive amount of new, speculative inventory that could come on line this year and next.
Right now, tight credit is holding back the market, and supply is piling up on the developer side as inventory. The government’s tightening squeezed buyers of second and third homes, and transaction volumes across the country collapsed. What I’ve learned from intermediaries is that most property demand now falls into restricted categories, i.e., speculative.
It’s reasonable to assume, therefore, that the supply would be close to 15% of GDP in value this year and in 2011. That’s because when the policy is relaxed — as most expect — speculation will probably revive and lead to a doubling in the total value of speculative inventory.
Chances are good that policy makers will indeed relax policy. In some cities, banks are already loosening a bit. A key reason is that local governments have a lot of debt — commonly five times more debt than revenue — and could get into financial trouble without a decent level of property transactions.
Local governments in China depend on real-estate deals for revenue and could default if the market falls too far. Thus, the central government may loosen policy to help the locals without making a formal announcement. Such a change of heart would ease short-term government difficulties but double the trouble down the road when the property bubble bursts.
So even if China’s stock of empty flats is only half that recent estimate of 64.5 million, it would still be equivalent to 20% of all urban households. That’s higher than Taiwan’s vacancy rate at the peak of its bubble. Moreover, as credit rules are loosened, the stock could rise to more than 30%.
China’s housing oversupply isn’t surprising. Excess supply reflects the under-pricing of capital, and China’s system is structured to increase supply quickly. But rising prices alongside rising vacancy rates are surprising. Normally, speculators are spooked by high vacancy rates. But China’s phenomenon is unique for at least four reasons:
1) A sustained negative real interest rate has led to a falling demand for money and rising appetite for speculation. Greed and inflation fears are working together to form unprecedented speculative demand for property.
2) A massive amount of gray income is seeking safe haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation with a depreciating dollar — the traditional safe haven — China’s rising property market is becoming a preferred place to park this money.
3) Few people in China have experienced a property bubble. The property crash in the 1990s touched a small segment of society, such as foreigners and state-owned enterprises. Geographically, it was restricted to the country’s freewheeling zones in Hainan, Guangdong and Shanghai. Most people didn’t even know there was a property crash. This ignorance has led to a lack of fear that’s now turbo-charging greed.
4) Speculators think the government won’t let property prices fall. They correctly surmise that local governments rely on property deals for money and do all they can to prop up prices. But their faith in government omnipotence is misplaced. At the end of the day, the market is bigger than the government. The government can delay, but not abolish, market forces. Nevertheless, faith in government is replacing fears of a downside, and speculative demand will continue to grow as long as credit is available.
In other parts of the world, central bank attitudes toward real-estate speculation are changing. Israel’s central bank just raised its interest rate, specifically citing a need to fight a property bubble. Property prices in Israel have risen 20% in the past 12 months. India, Korea and Taiwan are raising interest rates out of concern for inflation and speculation as well.
China’s problems are much bigger than what’s found in these economies. But keeping interest rates low will only worsen the nation’s bubble problem. Periodic credit tightening and crackdowns on speculation won’t work because they are not taken seriously and never last.
China’s latest property-market tightening appears to have been improvised. Of course, any buyer discrimination policy is complex, hard to implement and creates excessive market volatility. Now, if special-interest pressure leads to a change in policy, speculators would be further emboldened, and the excess would multiply, making the eventual adjustment so much more painful.
Raising interest rates, however, would cool speculative demand gradually, avoiding market disruptions. At this point, a rate hike would be the best policy option. But a delay in raising interest rates would only cause a surge for the stock of empty flats and inevitably lead to collapse.
Long range, a policy of sustainability would require resolving local government financial problems by increasing non-property revenue sources or limiting expenditures. Currently, the investment-led growth strategy that’s been adopted by all local governments inevitably leads to maximizing revenues from land sales. So unless limits are put on this strategy, the property market will function abnormally.
Property taxes could play a significant role in revenue streams. In many countries, property taxes support local governments and public services. China should adopt the same model, while also restricting fiscal spending.
The bottom line is that China urgently needs a coherent property strategy. The massive overhang of empty flats should goad policy makers to act now. If the government eases rules for the property market before adopting a coherent policy, though, a crash could bring down the economy for an extended period.
One only needs to glance at modern-day price and quantity property bubbles around the world to understand the stark consequences. What’s happening to the U.S. economy now is a prime example, and it should be lesson for us. Otherwise, China’s economy will look like America’s. See this commentary on Caixin Online.




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