By He Qinglian on January 30, 2012
(Translated by kRiZcPEc)
China has again created a “world
miracle” in economic growth rate. In 2011, the country's total GDP
was RMB 47.1 trillion (USD 7.4 trillion), the annual GDP growth rate
was 9.2%, and its nominal growth reached as high as 17.5%.
Such a growth rate could be deemed
exponential anywhere in the world, but that didn't mean China's
economy was growing steadily and soundly. Apart from showing an
expansion in the country's economy, GDP growth did not indicate its
structural problems had been resolved.
It had become a consensus of the
Chinese government, academics, and international observers since 2008
that the Chinese economy needs a structural adjustment. By adjustment
it means two things which are most paramount: the first is to cool
the real estate market and relieve it from the role of economic stimulator;
the second, the economic structure had to level up and shift from the
labor-intensive model to one that centered on technologies
(capitals). To get the pulse of China's economy, these two are what
to look at.
Unfortunately in 2011, the scale of
investment in the Chinese real property market grew despite
“stringent” regulations from the central government. As a result,
the bubbles of real property market and of currency remained.
Let's look first at just how big the
real estate bubble is. If based on the figures released by the
National Bureau of Statistics of China (NBS), in 2011 investment in
real estate fell by 5.3 percentage points, there was an
across-the-board deceleration in all indicators of the Chinese
housing market. These indicators included among others, growth
rate of investment in real estate development, of real estate sales,
of the source of funding of corporate developers this year, and of
the area of land purchased by real estate development enterprises
nationwide. Local governments revenue from land sales is said to have
dropped significantly. As the Transaction
information for 130 cities in the land market of China 2011
indicated, in 130 cities across the country the total
land premium was 1.86344 trillion yuan, far lower than the 2.9
trillion yuan in 2010. In general, local governments were entangled
in “land finance”. Last October the State Council had had to
approve Shanghai, Zhejiang, Guangdong and Shenzhen to pilot the local
bonds issuance so that they could make up for the insufficiency of
fiscal revenue.
The NBS played a concept game on
statistical data by using “the growth rate of investment” instead
of “the scale of investment” to deceive the public and prove the
central government's policy to regulate the real estate market had
been successful. That was not true. While indeed revenue from land
sales was falling, that did not keep real estate developers from
developing the land that they had already accumulated (land
inventory). The real estate sector once said that “2010 was for them the
most remarkable year”. Yet for
that sector 2011 turned out to be a year that was even more
remarkable: the annual investment in real estate was as high as 6.17
trillion yuan, a year-on-year increase of 27.9%; 4.43 trillion yuan
was invested in housing, a year-on-year growth of 30.2%; the area of
new housing construction was 1.9 billion square meters, a gain of
16.2% year-on-year; housing construction area stood at 5.08 billion
square meters, surging 25.3% year-on-year; and the area of housing
completed was 890 square meters, up 13.3% year-on-year. Therefore, Li
Zhanjun of Shanghai E-House Real Estate Institute concluded in his
article on the
truth of China's real estate market that “China's realty
enterprises are all practicing defensive development strategies, they
lengthen the development cycle, shorten the development front, and
choose the right time to push the flats to the market.”
The above figures showed that the real estate bubble hadn't shrunk; on the contrary, it expanded. The
Chinese government's macro-control strength has been weakening, and
could not achieve its policy objectives. In a nutshell, the Chinese
real estate market rose more than five folds in the past decade,
the total market value of urban and rural housing combined was close
to 100 trillion, accounting for roughly 290% of the country's GDP. By
comparison, that ratio in the United States is about 200% currently.
This reminds me of something in the past: before the Japanese real
estate bubble went bust, one Tokyo was enough to exchange for half
the United States.
And this subsequently led to another
bubble that the Chinese government has been unwilling to deal with:
the threat of the Chinese currency bubble (inflation).
The Chinese economy has been driven
mainly by investment. Consumption, made up 48% of the GDP in the late
1990s, fell to 36% in recent years; whereas investment accounted for
50% of the GDP. And the investment relied largely on the government,
whose fund came mainly from issuing currency. Among the various
investments, those in real estate depended heavily on bank loans. In
order to cool the property market, China had implemented a monetary
tightening policy starting from 2010. In 2011, many banks in China
reported negative growth in deposits; all of them saw a rise in the
deposit-loan ratio. As the inflation pressure eased, the central bank
began lifting its tightening policy and lowered for the first time
since 2008 the reserve requirement ratio so that the liquidity
tension could be relieved. Yet a monetary easing policy would
definitely bring new problems.
Economists generally use the ratio of
money supply to GDP to judge whether or not excessive currency has
been issued. For Western developed economies, that ratio is below
“1”; and for the emerging markets that ratio is relatively
higher, the currency supply volume is, in general, 1-1.5 times the
GDP, very few would be more than twice. The Chinese government aims
to keep the growth rate of currency supply at 17% per annum. The
actual currency supply volume, however, has been way larger than
that, and, overall speaking, far exceeded other emerging economies.
According to official data, China's total GDP volume in 2000 was 8.9
trillion yuan, and the M2 money supply was 13.5 trillion yuan,
putting it at 1.5 times of the GDP that year. By late September 2011,
China's total GDP was 26.866 trillion yuan, and the M2 money supply,
69.94 trillion yuan, 2.6 times of the GDP. According to a study by
Dan Bin, since
economic reform, China's [annual] economic growth rate has been about
10% on average; and the average growth rate of money supply per
annum, 31.5%; in some years the growth rate even exceeded 40%.
Therefore, in sum, China's economic history is a history of
inflation.
The dilemma for China is: if the
country is to reach the growth rate it has enjoyed in the past, huge
amount of capital input would be a must. From the fourth quarter last
year onward, the Chinese government is again pursuing economic growth
at all costs. What this entails is that all kinds of stimulate
policies would not be as effective as before, and that inflation
would come back very quickly and vengefully. Beijing has sought to
make use of the time it bought with the credit boom after 2008 to
shift the economy from the investment-driven model to the
consumption-led model, the result was not satisfactory. The fact that
the real property—which consume huge amount of investment—remains
heated revealed that China's economic restructuring has been
unsuccessful. As the real estate inventory increases, banks' bad debt
risk intensifies.
