Vol. II Issue. 26
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Housing crisis in China
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Anurag Bhattarai
25 June 2012
ANALYSIS
Chinese economy is slowing down. The expected growth rate is faltering and China is preparing for a soft landing. China's largest trading partner, the Euro-zone, is in deep economic crisis causing a negative impact on its balance of payment sheet. Moreover, the ?mal-investment' or over-investment in real state market has begun to take its toll on Chinese economy and will play a significant role in determining the economic trajectory of the nation in future. Some analysts are of the view that China is in for a hard landing and claim their assurance from the declining production of major industrial commodities and the speculative market of housing industry. However, China's economy is controlled by State owned enterprises (SOE's) and the standard operating mechanism of business cycle or economic cycle where there is a shift from economic boom to stagnation or recession and back to expansion is kept in check with counter-cyclical policies. The communist party of China has been described as the largest chamber of commerce in the world and their pre-occupation with growth is highlighted by the recent adoption of policies to cool off the property market and increase domestic consumption amidst slowing economy. Will the housing bubble pop resulting in a spectacular crisis, as many critics of Chinese economy anticipate, or will the Chinese state with its good track record in implementing stimulus policies come to rescue the faltering housing market? These are few questions among many that are occupying most of the debate pertaining to Chinese economy today.
Growing China
China has been growing for more than 30 years, an unprecedented continuum of economic growth in world's history, only with an exception of Botswana where population amounts to few millions and the country sits on huge diamond reserves. Chinese state obsession with economic growth is manifested in many of its undertakings controlled by the state. One of the variables that keep its GDP ticking is infrastructure; it is estimated 10 new cities are built every year. The construction of metropolis goes on. China is a command economy and the state can dictate where the recourses should be spent. China's housing bubble is apparent by the rising property prices and the on-going construction of high-end apartment buildings in the major cities of China and new urban centers. Chinese housing bubble expanded quickly in 2008, a curse in disguise of the stimulus package, when Beijing injected a trillion yuan into fixed asset investments like roads, bridges and apartment complexes. The intention was to keep Chinese economy shielded from the US housing and credit crisis. Not only was it able to keep away the global economic crisis from reaching home, Chinas GDP growth increased by 11.9 percent in the first quarter of 2009 as compared to 6.2 percent the previous year. The housing price index has risen by at least 70% since 2000, and year over year, housing prices are up by as much as 10% in some cities, and by at least 3% in the major tier cities, according to National Bureau Statistics. The rising housing prices in China is considered similar by some analysts as property bubble that occurred in Japan and US in 1982-1991 and 1996-2006 respectively. What followed the bubble were painful adjustments, a sub-prime crisis in US and the "lost-decade" in Japan. Will China be able to avoid a crisis of similar nature that strangulated the economy of major economic powerhouse like US and Japan? The real estate investment and construction is about a quarter of total fixed investment, at 12% of GDP. Its overall impact on GDP is significantly greater given its links with steel, construction material, furniture, electronics and service industries. Chinese policy makers have been trying to deflate the housing bubble but with limited success. According to National Bureau of Statistics new apartments prices have declined 1.5 percent in average terms since their peak in the second half of 2011. However, home prices in major cities are still among the highest in the world and take more than 15 years annual disposable income for Beijing residents to buy one property there, according to Societe Generale analyst Wei Yao. The real state obsession that came as a response to global financial crisis when Chinese government loosened restriction on lending to keep the economy growing sparked a steep rise in the housing price until recently. But the economic downturn has struck the housing market of China and the conventional belief that rested on the idea, if u built it they will come, is starting to look illusive. There are estimated 64 million apartments that are vacant and with no prospective buyers at sight, prices are bound to step down considerably. With lenders and developers not having enough capital to clear out their debt, the situation at ground looks quite dismal to say the least. However, given the nature of its state-controlled economy the likelihood of a spectacular crisis analogous to the one in Japan and United States is minimal at best. Chinese economy is slowing down, from 10 percent in 2010 to 9 percent in 2012, but much of it is a controlled cooling and is related to slowing in the core economies.
Growth, but for whom?
The new urban centre and high-end apartment buildings reminds an onlooker of a ghost town or a place affected by a viral breakout. A sheer emptiness in the apartment buildings and urban centers triggers an alarming bell. China is building infrastructure for which there is no demand. It has been reported that there are 64 million empty apartment buildings in China and due to the speculative nature of the housing market, the prices for these apartments are very high. The annual wage of average worker amounts to $6000 and can't afford to live in these apartments. The consumer culture in China is grossly overestimated. The domestic consumption come to make 1/3rd of the country GDP and in absence of effective social safety net Chinese are reluctant to spend. There are millions of empty homes and millions of Chinese who can't afford to live in them. There have been reports indicating that home ownership is an implausible dream for 60 percent of Chinas urban residents and the figure could reach to a staggering 85 percent if taken into account the massive inflow of rural migrants into Chinese cities every year. The obvious problem is how long can these infrastructure remain vacant and how will the state provide affordable housing for millions of Chinese workers who cannot afford to live in the houses meant for speculative purposes. There are indications from Chinese sociologist of deepening divisions of inequality in China and how it can fuel civil unrest if not a revolution given the trend persists.
On a positive note, a report released by SouFun Holdings Ltd, Chinas largest real estate, shows a month-on-month increase in sales from May to April in 34 out of 40 large cities across the country. In major cities like Beijing, Guangzhou and Shenzhen, sales have nearly doubled from 21,000 in April to 40,000 in May. Analysts are of the view that rises in sales of houses is largely an outcome of the fine tuning policies that the government has adopted to stabilize the slowing economy. Simon Cox, Asia Economist editor, points out that Chinese understand that economy left to its own devices will falter and the ideal response of the government would be to devise counter-cyclical policies which China does efficiently. He argues, 50% of public investment is in infrastructure and capital which is geared towards the future which allows China, a room for error. To substantiate Cox argument, IMF-HKMA (2010) research found that over the past decade, when misalignments in house prices have occurred in China, they have been corrected relatively quicker, says Barclays Capital analyst. However, the aspiration of majority of China's burgeoning middle class to afford a decent housing and the states ability to translate those into actuality will determine the nature of crisis it faces. Today, there are millions of migrant labors working in the cities trying to find their space at the margins of the metropolis. Their place in the metropolis is pre-determined by their capability to afford a decent home. Affordable housing for the majority of Chinese middle class is need of the hour and the state should implement policies that cater to its population not to a mere percentage fluctuations in economic growth.
(Anurag Bhattarai is a Research Intern at Observer Research Foundation)
FOREIGN AFFAIRS
ASEAN should not be a tool of major powers: China
China asked the Association of South East Asian Nations (ASEAN) not be a bystander in or a "tool of major powers" while dealing new challenges of current global political and economic atmosphere. "ASEAN has an important role to play with its tried-and-true ASEAN Way, as major powers are shaping their new relations in the region," said the Chinese Vice Foreign Minister Fu Ying. She said that relations with ASEAN countries remained a priority for China. However, "ASEAN should exercise its independent judgment to move this region forward. If ASEAN takes sides, it would lose its relevance."
Source (s): China Daily, June 25, 2012.
Vietnamese maritime law erroneous, says China
Showing its discontent with the new maritime law passed by Vietnam, which includes Paracel and Spratly Islands under Vietnamese sovereignty, China expressed it firm opposition to the move and urged it "to correct the erroneous practice immediately." "The move by the Vietnamese National Assembly is a serious violation of China's territorial sovereignty and is illegal and invalid. It violates the consensus reached by both leaders, as well as the principles of the Declaration on the Conduct of Parties in the South China Sea," the Chinese National People's Congress' (NPC) Foreign Affairs Committee said in the letter.
Source (s):China Daily, June 22, 2012.
China and Brazil upgrade ties to strategic level
During Chinese Premier Wen Jiabao's visit to Brazil, both countries decided to upgrade the bilateral relations to a comprehensive strategic partnership level. The two sides have also decided to set up a comprehensive strategic dialogue mechanism between their foreign ministers and signed a ten-year cooperation plan. While noting the achievements made by both countries since the establishment of strategic partnership, China was willing to cooperate with Brazil in forming a new, just and reasonable international order. The Brazilian President Dilma Rousseff said that the bilateral relations had already reached an unprecedented level and Brazil was willing to enhance cooperation with China in such areas as economy and trade, technology, aviation, astronautics, and agriculture, strengthen bilateral coordination on major international issues and continuously enrich the strategic content of bilateral ties.
Source (S):China Daily, June 22, 2012.
ECONOMY
Incentive measures to boost consumer spending
In an attempt to stimulate consumption, China is all set out to implement "concrete measures" to uplift efficiency and cut the cost of logistics, according to Huang Hai, former assistant minister of commerce. The stimulation package to be announced at the national circulation conference in late June or early July is said to focus on the movement of goods and is a part of efforts to stabilize the slowing economy amid deepening crisis in Euro-zone. Issues concerning logistics and transportation will be the key area of focus as the conference commences, while getting goods to the market quicker and cheaper is set to play a key role in boosting consumer spending.
According to the National Bureau of Statistics, there has been a rapid increase in logistics cost, including transport, storage and management fees, which accounted for 17.8 percent of the nations GDP in 2010. Comparatively, such figure is higher than 10 percent average in developed nations. To stimulate consumer spending, the government pledged last month to allocate 26.5 billion Yuan ($4.2 billion) to subsidize purchases of energy-saving household appliances and 6 billion Yuan to boost sales of energy-efficient vehicles. In light of the adopted measures in slowing economy, Huang said, "It's not a problem of whether to stimulate domestic consumption or not, but a problem of how to do it and in which sectors.".
Source (S): China Daily, June 20, 2012
Auditing shows embezzlement in foreign loan projects
According to the auditing results released by the National Audit Office (NAO) on Monday, 237 million yuan (37.62 million dollars) were embezzled or held up in projects funded by foreign loans or financial aid to China in 2010. In a statement released on its website, NAO said the involved money was found in six projects out of 99 projects that were audited comprising agriculture, energy, transport, education, health and urban-construction. However, it stated further that the relevant authorities were able to recover the embezzled money. Furthermore, it added that as of the end of 2010, these projects had taken foreign capital worth 34.5 billion yuan. 424.62 billion yuan was the total planned investment for these 99 projects.
Source (S):People Daily, June 19, 2012
1 trillion Yuan: New bank loans for July
New bank loans from China's four state-owned banks amounted to 25 billion yuan for the first 15 days in June. China Securities Journal cited sources saying the number is expected to reach 900 billion to 1 trillion by the end of month. Commercial banks loans are generally expected to surge at the end of the month. At the beginning of June, China Banking Regulatory Commission required commercial banks to increase credit supply, particularly bank loan support to the construction of railways, highways, and other infrastructure facilities. In April 682 billion yuan in new bank loans were issued and the number quickly increased to 793.2 billion in May.
According to industry sources, the demand for credit from major projects is waiting for approval. There will be a steady release of loans in June and July, and growth of credit is expected to slowly rebound.
Source (S):China Daily, 21 June, 2012
POLITICS AND SOCIETY
Shanghai tightens controls on property sector
In move to tighten control over the property sector, the Shanghai city authorities have forbidden non permanent resident permit holders from buying property in Shanghai, even if they social insurance premiums. For a non-permanent resident permit holder to buy a property, he or she needs to pay income tax or social insurance premium for an aggregated period of at least one year within the past two years.
However, some buyers who did not pay insurance premiums for that long simply supplemented the required amount to the already paid premiums and were able to make purchases, creating a loophole in the regulation. The new rules are move to cover up this loophole and such acts are not allowed starting from June 15, 2012.
Source (S):China Daily, June 22, 2012.
China to introduce progressive water pricing
China will adopt a progressive pricing system for water use before the 2015. In such a scheme the price of water will increase exponentially with the increase in consumption. China will also adopt high water rates for water-intensive industries and encourage reusing recycled water, according to the plan distributed by the National Development and Reform Commission (NDRC), the top economic planner, and two other ministries. Price discounts will be offered in rural areas based on quotas and calculate prices progressively when they use more than the quotas.
Source (S):China Daily, June 22, 2012.
SCIENCE AND TECHNOLOGY
China conducts first manned space docking
On June 24, Shenzhou IX spacecraft was manually docked by Chinese astronauts with the orbiting Tiangong-1 lab module, for the first time in history. The manual docking was completed in only 7 minutes, 3 minutes faster than the automatic docking, said Liu Weibo, who is responsible for China's astronaut system.
The manual docking feat is another example of China's growing capabilities in space. The manual docking is a significant step for China's manned space program that celebrated its 20th anniversary this year, as China has fully grasped space travel, space walk and space rendezvous and docking technologies that are essential to building a space station, said Zhou Jianping, designer-in-chief of China's manned space program.
Source (S):China Daily, June 24, 2012.
Contributors:
• Sadhavi Chauhan
• Priyanka Mehrotra
• Anurag Bhattarai
• Rahul Prakash
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