"Sinocism is the Presidential Daily Brief for China hands"- Evan Osnos, New Yorker Correspondent and National Book Award Winner
It is impossible to separate politics from economic policy in China, especially in such a lucrative industry as real estate development. As the details of the recent measures designed to cool off China’s property market come out, it is useful to consider what the politics behind the rules may be.
On Tuesday Caixin published a very interesting article-“New Rules Pour Cold Water on Housing Market“. In describing the backdrop to the drafting of the new measures, Caixin writes that:
a report submitted to Deputy Premier Li Keqiang said surging prices for housing price posed a threat to social stability.
The government initially hesitated to move against higher prices in March. Caixin learned that the market got suddenly hotter mainly because the government stalled over whether to cool property buying.
Even though CBRC Chairman Liu Mingkang said April 11 that regulators would feel relatively safe if the minimum down payment were raised to 50 or 60 percent of a second apartment’s price, CBRC the next day denied media reports that the minimum down payment would be raised to 60 percent.
An adviser to the State Council who declined to be named said some high-ranking officials feared intervention in the property market would drag down economic growth, raise bank default rates and reduce personal incomes.
This adviser, however, believed economic growth would not slow, as low-cost apartments would continue to be built and urbanization would continue to drive growth. He also pointed out that bad loans would not pile up if regulators strengthened supervision and commercial banks managed risk carefully. And he said personal income would be unharmed since only the wealthy buy apartments for investment.
But the government later changed course and turned to its arsenal for fighting overheating in the property market. It’s actually a huge arsenal, since the state owns most banks and land.
A Ministry of Land Resources official said the State Council made a decision that it was resolved to stabilize housing prices. Moreover, he said, “no one cares” about business pressures that may be borne by property developers affected by the regulatory restrictions. [This article details many of the sales tricks, now “banned”, Chinese developers use. Of course some have been “banned” before.]
If anyone needed a reminder that China is not yet a market economy, here is one:
That the land ministry and State Council have been working hand-in-hand was illustrated by the fact that the ministry announced its 2010 land-use plan on the same day that the new down payment rates were unveiled.
Under the plan, the supply of new land available for development this year can reach up to 180,000 hectares, up 130 percent from last year. And more than 40 percent of the land earmarked for commercial development will be set aside for apartments smaller than 90 square meters.
The land decision reflected the ministry’s resolve to step up property development oversight in light of the price frenzy. “The Ministry of Land Resources had said that housing prices should be determined by the market,” said a source close to the State Council. “Now they changed their tone.”
The new rules actually leave room for interpretation at the local government level, as the language in the State Council circular is written ambiguously for several of the measures, stating that they “can be” implemented in “areas suffering from excess property price rise”. The 21st Century Herald published a long article (Chinese only) Monday evening describing the uncertainty among bankers as to whether or not they needed to implement rules. To be safe, most of them probably will, at least until they have further “clarification”.
So what could the political backdrop be to these new measures? To quote from a recent post on Premier Wen Jiabao’s essay remembering Hu Yaobang, I will guess that perhaps:
Hu [Jintao] and Wen understand that without a rebalancing of development priorities and a meaningful reduction in some of the more egregious corruption there could be significant risks to the stability of the government. Harkening back to Hu Yaobang may be a signal that more substantive and muscular policies are coming that will lead China to act a bit more like a Socialist country.
The Caixin article quoted above stated that “a report submitted to Deputy Premier Li Keqiang said surging prices for housing price posed a threat to social stability”.
The threat to stability comes from the lack of low-income, affordable housing; the increasing strains on the middle class, and the dissatisfaction and at times violence stemming from collusion between local officials and developers that leads to under-compensated and sometimes forced relocations of citizens to make way for new developments. News of these violent relocations appears weekly if not almost daily. The Chinese press today reported on an incident in Hebei province in which a villager was run over by a bulldozer and killed while protesting the demolition of her home. Last week the Chinese Internet was alight with a video of a family fighting off forced relocation in the rural Yanqing district of Beijing. You can watch the video here; it is quite eye-opening.
UPDATE1: I neglected to mention another, obvious stability challenge for the government that these new property measures could cause. A lot of people, especially the urban middle class and Communist Party members, have bought apartments in recent years. Too much of a drop in prices will lead to significant resent among those constituencies. Along those lines, Bloomberg today quotes People’s Bank of China adviser Li Daokui as saying that: “The property market will not see price falls of 20 to 30 percent because that could ‘could lead to new social problems‘”. It is not going to be easy for the government to have the prices not go up anymore but also not drop too much. But I guess central planning inclinations die hard.
The Chinese leadership is already preparing for the 18th Party Congress in 2012 and the personnel changes that will occur. Now is not the time to take risks with your career, and so most officials will likely line up behind the new State Council rules. In fact, given the ambiguity of some of these rules, the more politically sensitive ones may believe it makes sense to enforce them quite rigorously, if they really believe that the Central government is serious this time about pushing forward with a rebalancing of development priorities. These new rules could put local officials in a real quandary, as local governments are so reliant on land transfer fees for revenue.
No official will likely forget the lesson of Chen Liangyu, the deposed Shanghai Party chief. There are lots of reasons for his downfall, including egregious corruption. But the trigger for the investigation that led to his arrest, according to the somewhat reliable Beijing grapevine, was his open challenge and defiance of Wen Jiabao during a previous attempt to cool off a surging property market and rebalance development.
Will these new measures be enough to cool off China’s property market and avoid a spectacular bubble and crash? I don’t know. Andy Xie doesn’t think so, as he writes today in “Wrangling with the Wild Bulls“, but I doubt his calls for significantly higher interest rates will be heeded anytime soon.
I spoke with a friend who is a senior executive at a major Chinese real estate firm. He said that these measures were much broader and harsher than the market expected, but that they were actually quite healthy for the market in the medium to long term. He also said that we should all hope they work, because if they do not, who knows how much harsher the next round of measures might be.
What did you make of this line from XIe: “People have been withdrawing their savings and borrowing as much as possible to buy property, regardless of the price.” Does he have any evidence of this or is it once again a case of Andy being Andy?
I am sure he has heard of people doing that, but does an anecdote or two make a trend? Or does he have hard data to back it up? I don’t know.
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What did you make of this line from XIe: “People have been withdrawing their savings and borrowing as much as possible to buy property, regardless of the price.” Does he have any evidence of this or is it once again a case of Andy being Andy?
I am sure he has heard of people doing that, but does an anecdote or two make a trend? Or does he have hard data to back it up? I don't know.
I admire the level of detail achieved in these postings. But as an academic economist who watches China from a distance, I urge you to put the granular detail in a frame of theorizing, which can sometimes make it possible to draw a bottom line and make stronger assertions about the future. Could be as simplistic as supply and demand: separate out all the ways in which the new regs push either supply, or demand, in, or out. Could be a macro framework: where does a housing bubble come from? (maybe the surge of liquidity injected in 2009 QI?) Can these new regs be interpreted as administrative measures intended to supplement a (still uncertain) market-based, interest rate-based macro mechanism in China? If so, what’s the track record on administrative overrides of sloshing liquidity?
Thanks for the super well-informed commentary.
Thanks for the comment. You bring up really important points
This latest housing frenzy can clearly be traced to the massive liquidity
injected into the Chinese economy starting in Q1 09. People should remember
that housing prices in major cities like Beijing dropped 20-30% in q3/q4 08
and early q1 09. But during the financial crisis the government turned on
the RMB presses, and subsequently various administrative measures enacted in
2008 that were designed to cool off the housing market, home prices once
again began to climb.
I have been thinking about the question of the efficacy of raising interest
rates a lot. I know a lot of the well known China bear pundits argue that
China needs to immediately raise rates; some say by as much as 500 basis
point. I doubt the government is going to listen to that advice, and if they
did it would likely throttle other areas of the economy. Headline numbers
aside, the economy is not very healthy, and has not been for a while.
Meanwhile, these new measures do raise the interest rates specifically on
mortgages, by ending various discount schemes on mortgage rates.
The government likes the administrative measures because they can be very
targeted and have the effect of raising costs for real estate purchases,
including specifically raising interest rates, while at least theoretically
keeping that impact of that rate rise much more localized.
As to how quantify the impact of the administrative measures, all I have
seen are guess so far. Yesterday one real estate industry insider was quoted
in the Chinese press as saying that the combination of the increase in down
payment percentage, the progressive increase in the mortgage rates, the
numerical limit on home purchases, and the restriction on non Beijingers
buying probably cuts the pool of buyers in Beijing right now by about 50%.
How accurate is that? I have no idea; it is too early to tell. But if he is
even in the ballpark, then these measures, as long as they are in effect,
would seem to be at least as effective in the short-term as an overall
increase in interest rates.
As you know, Beijing’s track record on these kinds of administrative
measures is very mixed. When implemented and enforced they can be quite
effective. But they usually fade out relatively quickly, as there are too
many conflicting interests and too many ways for local governments to get
around the rules.
From Beijing’s perspective, this time needs to be different, as stresses
around real estate are such that if they are not properly handled they could
cause the biggest threat to stability here in decades. I am actually
“optimistic” that these measures, which most Chinese observers have called
the harshest and most targeted in the (albeit short) history of china’s real
estate market history, will be held in place for a relatively long period of
time.
In an ideal world, during that period of time in which the market is cooling
the government will be able to take steps to implement deeper reforms to
address the structural issues, both economic and political, that have
contributed to the distortion of not just real estate but most markets in
China. We don’t live in an ideal world though, the 18th Party Congress is
two years away, and in some quarters of the Party western economic theory
has taken quite a blow since the financial collapse. So I think we are more
likely to see muddling through, trying to address issues as they come up; ie
a continuation of this very hard-to-model creation better known in China as
Socialism with Chinese Characteristics.
Will that work? Possibly, at least for longer than most observers may think.
The government has all sorts of non-economic ways, from measures like the
ones discussed above to a much upgraded security infrastructure, that have
kept and can continue to keep this going longer than would seem possible
from a pure economics perspective.
Will it eventually fall off a cliff? I have no idea, though, having been in
and out of China since the late 80s, I tend to believe the government’s
ability to navigate this strange economic creation, however imperfectly, has
consistently been underestimated. And at least they recognize the risk of
asset bubbles and are taking serious steps to try to deflate them.
I admire the level of detail achieved in these postings. But as an academic economist who watches China from a distance, I urge you to put the granular detail in a frame of theorizing, which can sometimes make it possible to draw a bottom line and make stronger assertions about the future. Could be as simplistic as supply and demand: separate out all the ways in which the new regs push either supply, or demand, in, or out. Could be a macro framework: where does a housing bubble come from? (maybe the surge of liquidity injected in 2009 QI?) Can these new regs be interpreted as administrative measures intended to supplement a (still uncertain) market-based, interest rate-based macro mechanism in China? If so, what's the track record on administrative overrides of sloshing liquidity?
Thanks for the super well-informed commentary.
Thanks for the comment. You bring up really important points
This latest housing frenzy can clearly be traced to the massive liquidity
injected into the Chinese economy starting in Q1 09. People should remember
that housing prices in major cities like Beijing dropped 20-30% in q3/q4 08
and early q1 09. But during the financial crisis the government turned on
the RMB presses, and subsequently various administrative measures enacted in
2008 that were designed to cool off the housing market, home prices once
again began to climb.
I have been thinking about the question of the efficacy of raising interest
rates a lot. I know a lot of the well known China bear pundits argue that
China needs to immediately raise rates; some say by as much as 500 basis
point. I doubt the government is going to listen to that advice, and if they
did it would likely throttle other areas of the economy. Headline numbers
aside, the economy is not very healthy, and has not been for a while.
Meanwhile, these new measures do raise the interest rates specifically on
mortgages, by ending various discount schemes on mortgage rates.
The government likes the administrative measures because they can be very
targeted and have the effect of raising costs for real estate purchases,
including specifically raising interest rates, while at least theoretically
keeping that impact of that rate rise much more localized.
As to how quantify the impact of the administrative measures, all I have
seen are guess so far. Yesterday one real estate industry insider was quoted
in the Chinese press as saying that the combination of the increase in down
payment percentage, the progressive increase in the mortgage rates, the
numerical limit on home purchases, and the restriction on non Beijingers
buying probably cuts the pool of buyers in Beijing right now by about 50%.
How accurate is that? I have no idea; it is too early to tell. But if he is
even in the ballpark, then these measures, as long as they are in effect,
would seem to be at least as effective in the short-term as an overall
increase in interest rates.
As you know, Beijing's track record on these kinds of administrative
measures is very mixed. When implemented and enforced they can be quite
effective. But they usually fade out relatively quickly, as there are too
many conflicting interests and too many ways for local governments to get
around the rules.
From Beijing's perspective, this time needs to be different, as stresses
around real estate are such that if they are not properly handled they could
cause the biggest threat to stability here in decades. I am actually
“optimistic” that these measures, which most Chinese observers have called
the harshest and most targeted in the (albeit short) history of china's real
estate market history, will be held in place for a relatively long period of
time.
In an ideal world, during that period of time in which the market is cooling
the government will be able to take steps to implement deeper reforms to
address the structural issues, both economic and political, that have
contributed to the distortion of not just real estate but most markets in
China. We don't live in an ideal world though, the 18th Party Congress is
two years away, and in some quarters of the Party western economic theory
has taken quite a blow since the financial collapse. So I think we are more
likely to see muddling through, trying to address issues as they come up; ie
a continuation of this very hard-to-model creation better known in China as
Socialism with Chinese Characteristics.
Will that work? Possibly, at least for longer than most observers may think.
The government has all sorts of non-economic ways, from measures like the
ones discussed above to a much upgraded security infrastructure, that have
kept and can continue to keep this going longer than would seem possible
from a pure economics perspective.
Will it eventually fall off a cliff? I have no idea, though, having been in
and out of China since the late 80s, I tend to believe the government's
ability to navigate this strange economic creation, however imperfectly, has
consistently been underestimated. And at least they recognize the risk of
asset bubbles and are taking serious steps to try to deflate them.