High GDP growth: China's two bubbles remain

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.