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China s property prices and its local-government debt have started rising
again. That may be a good thing
Jul 28th 2012 | BEIJING | from the print edition
FANGZHUANG, a high-rise neighbourhood tucked inside Beijing s third ring road,
was one of China s first commercial housing projects. Its four divisions share
a park, schools, a courthouse and a Carrefour supermarket. Characters in the
divisions four names combine to mean stars of the ancient world . Back in
1990 Fangzhuang flats sold for about 1,500 yuan ($234 at today s rate) per
square metre, according to Credit Suisse, a bank. Since then, prices have
reached for the stars of the modern world, exceeding 30,000 yuan in that part
of Beijing.
China s unruly property market was once dubbed, with excusable hyperbole, the
most important sector in the entire global economy by Jonathan Anderson, then
at UBS, another Swiss bank. It remains the biggest fear hanging over the world
s second-biggest economy. Home prices began falling about a year ago. The
declines have depressed investment and curtailed economic growth, which slowed
to 7.6% in the second quarter, its slowest rate since 2009.
The only economic anxiety to rival property is local-government debt. Estimated
at 10.7 trillion yuan at the end of 2010 by official auditors (and a lot higher
by unofficial ones), much of it was held at one remove by so-called
local-government financing vehicles. When one such, Yunnan Highway Development
and Investment, told creditors in 2011 that it would not repay the principal on
their loans, it was described (with equal hyperbole) as the default heard
around the world by Business Insider, a news website.
Both worries have roots in the stimulus spree on which China embarked in
November 2008. State-owned enterprises began bidding enthusiastically in land
auctions, and local governments let their pet projects run wild. Ever since,
the two problems have preoccupied China s central government. In April 2010 it
put curbs on speculative homebuying and spent much of last year tidying up
local finances. This spring, Wen Jiabao, the prime minister, boasted that
local-government debt had grown by a mere 300m yuan in 2011.
Signs, however, are growing that both property prices and local-government
borrowing are rising again. China s National Bureau of Statistics (NBS) reports
that new home prices rose in June in 25 of 70 cities it tracks. They fell in
only 21. Sales volumes also strengthened. Prices are still lower, on average,
than a year ago. But according to our weighted average of the (new and
existing) home prices reported by the NBS, the pace of decline appears to be
bottoming out (see chart). By next month (thanks to a lower base), prices may
be rising again, year-on-year.
Local governments meanwhile have been given leave from their debtors prison.
Reports suggest that China s banking regulator has told banks to increase
lending to better qualified financing vehicles. These vehicles have also
increased their bond sales, issuing over 420 billion yuan-worth of paper
already this year.
These twin turnarounds might be good news a sign that property prices have
stabilised and local governments have restored their creditworthiness. But they
could also be signs of desperation, evidence that the central government has
lost its nerve in the face of falling growth.
The rise in local-government borrowing is something in between: a defensible
response to a worrying slowdown. China s economy does need help, and its
government has ample scope to provide it. Some local governments took on more
debt than they could handle. But their liabilities never endangered the fiscal
position of the country as a whole. The combined debts of China s central and
local governments add up to about 50% of the country s GDP (including bonds
issued by the Ministry of Railways and China s policy banks, intended for
state-directed lending). Even if local debts are understated, China has fiscal
room for error. Local governments will also borrow less and invest better than
they did in the previous stimulus effort, argues Peng Wensheng of China
International Capital Corporation, a Chinese investment bank. The pressure for
policy easing is much less now than it was in November 2008, he says.
The rebound in the property market is harder to interpret. It may also reflect
a misreading of government policy. Some local governments have eased property
curbs surreptitiously, hoping to revive construction jobs and land sales (and
thus their revenues). The central government is also keen to encourage
first-time homebuyers. But it insists that it will still strictly enforce
existing curbs on people, especially out-of-towners, buying more than one home.
This week the State Council, China s cabinet, said it would send inspectors to
16 cities and provinces to curb backsliding.
Yet in most cities, says Jinsong Du of Credit Suisse, it is ever easier to
circumvent the rules. He cites one high-profile launch in Shanghai where the
flats went for $3m each. Even the estate agents on site admitted that most
buyers already owned several other properties.
But surely if China s property market was a burst bubble, even a forthright
relaxation of controls would not reflate it? After America s property prices
began falling in earnest, policymakers tried in vain for years to revive them.
Japan has been trying to perk up prices for more than 20 years.
China s property dynamics may differ, however. In many asset bubbles, prices
are pushed up by greedy investors, who borrow heavily to buy. When their
creditors get nervous, they default or dump their assets. These fire sales
quickly feed on themselves. But China s property-buyers are often wealthy firms
and individuals looking for somewhere to park their savings. Certainly, they
see property as an investment. But they do not necessarily expect prices to go
through the roof. Give them any prospect of beating inflation in the long run,
and they will buy. China, after all, offers few other options.
from the print edition | China