China Daily

Battle of the Bubble Bulge

Please download here: ChinaDaily_2010.4.29.pdf


The central government and the HKSAR government have recently been rolling out new measures aiming to curb the overheating property markets.

The March figure of 11.7 percent year-on-year rise of both residential and commercial real-estate prices released by the National Bureau of Statistic serve as warning signs for the mainland property sector Realizing the re-imposed sales tax and mortgage rates hikes earlier this year failed to contain housing prices against the speculative activities, the State Council introduced the series of new measures in an attempt to cool off the hot sector.

On April 15, the State Council lifted mortgage rates to 1.1 times the benchmark lending rate and raised the down payment requirement to 50 percent from 40 percent on second-home mortgages.  In addition, land supply for new home building increased to 180,000 hectares from 76,500 hectares in 2009.  Finally, bank loans were restricted for third home purchases if buyers fail to provide tax returns or proof of social ecurity contributions.

If these new policies have not been enough to demonstrate the determination of the central government to contain surging property prices, then new restrictions announced on April 20 to avert hoarding of inventory by developers should have ensured that some clear statements have been delivered.

The message is clear: zero tolerance of asset bubble formation in the nation’s housing market, despite the housing sector’s accounting for approximately 10 percent of the economy, as well as being a major source of income for local governments.

Tracing limited similarities to stock markets or other asset classes, crashed property markets could take up to seven years or longer to recover, and new highs in some extremely hot sectors may take decades to be reached again.

China is striving to contain any form of property bubble, even at its very initial stage – a policy perspective consistent with Premier Wen Jiabao’s vision of “stability and social harmony”.  The new policies from Beijing specifically targeting speculators are perceived to have minimal impact on first-time home buyers. The tightening policies regarding second- or third-home purchases should be able to suppress property prices, bringing prices closer to the true demand curve. The policies should effectively decelerate the provoked housing market within the next 3 to 6 months.

Concurrent with the tightening up north, the Hong Kong government has also begun to take action targeting the local property market. On April 22, Financial Secretary John Tsang pressed new guidelines for the Real Estate Developers Association of Hong Kong (REDAHK) on selling of residential properties. The guidelines include disclosures on insider/related-party transactions, 7-days’ advance release of sales brochures, price lists that are to be made available 3 days prior to commencement of sales, actual-size exhibition flats and a higher minimum number of flats available in the first price list.

Mr. Tsang also proposed to increase the stamp duty on luxury properties to 4.24 per cent.

However, despite the accord and congruence of mainland and HKSAR government intentions, the mainland and Hong Kong markets demonstrate key fundamental differences. The new measures suggested by John Tsang are not legally binding, being voluntary guidelines proposed to REDAHK.  Most of the guidelines have targeted developers and their marketing practices on selling new flats. There have been only limited measures for tackling speculative activities, particularly in the secondary market.

“With the Hong Kong dollar pegged to the US dollar, the absence of independent monetary policy, depository insurance and limited supply of land are all essential elements for a housing bubble breeding ground.”

Instead of a change of stance to curb rising property prices, the “voluntary guidelines” came after the Hong Kong government elicited severe media pressure and accusations of pro-developer policies. Property price surges in Hong Kong are mainly capital-driven (from abroad or from the mainland) while on the mainland, they are driven by domestic demand. With the Hong Kong dollar pegged to the US dollar, the absence of independent monetary policy, depository insurance and limited supply of land are all essential elements for a housing bubble breeding ground.

It is a publicly known fact that the finance and property pillars propel the Hong Kong economy and have been supporting the service industries for the past two decades. Massive wealth has accumulated within the property market over the past two decades for those in the middle classes who managed to overcome the numerous peaks and troughs during the period and managed to pay off their mortgages. The policy failure in 2000 resulted in a property market downturn and has tempered the city’s housing policies since then. It is understandable that government officials will be conservative in their approach to a potential housing bubble.

Nevertheless, the government has many options in endeavoring to further reduce price pressure, such as increasing stamp duties on property transactions, resuming the Home Ownership Scheme or gradually increasing the supply of land. After all, a balanced housing policy is designed to ensure home prices remain within the parameter of affordability for the general public. The government should act if external factors distort prices, stability and cohesiveness of a society. A destructive environment will most definitely choke off the productivity of the golden goose, if not suffocate it.


Mainland housing prices bound to fall

Please download here: ChinaDaily_2010.7.13.pdf


On July 6, Kenneth Rogoff, professor at Harvard University and former chief economist of the International Monetary Fund, speaking through a television interview in Hong Kong warned of a looming shock in the Chinese property market and its possible impact on the banking system if a signifi cant property price fall is triggered.

The forewarning came days after Xu Shaoshi, the country’s minister of land and resources, expressed his expectations for a broad range price correction in the fourth quarter as the cash flows of developers tighten.

Unlike stock and commodities markets, property is a unique asset class that has a direct impact on the livelihood of the country’s citizens, in virtue of which it deserves stricter governmental monitoring and regulations. A major price crash could mean a catastrophic aftermath for any economy - both in scale and duration. It has been over 20 years since Japan’s property collapse, but Japan is still suffering from the burst housing bubbles that wiped out billions of dollars nationwide – a process that history appears to be repeating in the US.

Here at home, the Central Government is definitely adopting a more direct approach in an attempt to cool off the sector compared with policies adopted two years ago. The stringent down-payment requirements, restrictions on third home purchases along with other measures set by the State Council in April have successfully forced speculators to exit the housing market. Transactions on new homes plummeted 25 percent in May and new home sales in Beijing, for example, declined 30 percent month-on-month in June.

Nevertheless, new home prices have remained stable since April. Over the past few months, developers have been reluctant to take the initiative in cutting prices, instead choosing to delay or reduce the size of new projects launched, while keeping a close eye on the Central Government’s latest policy development. Almost all developers are anticipating a price drop, but no one is taking the initiative to act fist. The unwillingness on price cutting from the developers may relate to the fact that the value of unsold units is pledged as collateral to banks that the developers borrow from.

The developers may be fighting an uphill battle on price cutting or fire sales, as market participants are no longer anticipating price appreciation, instead expecting a significant price adjustment downward.

Rents in Beijing, Shanghai, Guangzhou and Shenzhen have all been picking up since April, which may suggest that demand for new homes is shifting to the rental market while buyers wait for the price adjustment to come.

According to Centerline, in June secondary home prices in the above four major cities fell in tandem.

With the diminishing demand and continuing accumulation of inventory, new home prices are set to decline. While the degree of adjustments may vary geographically, a 15 to 25 percent average price cut nationwide seems imminent. If prices are not falling into the affordable range for average home buyers, and with rents surging to put upward pressure on the CPI, the Central Government will likely continue to depress prices with additional measures. It has learned of the danger of housing bubbles from the developed countries and is willing to take adequate precautions and measure to cool off the heating sector even at certain cost to domestic GDP growth

The author is a visiting professor at the Asian International Open University, an international financial commentator on NOW Business News Channel and founder of The opinion expressed in this article is entirely his own.


Could a rapid yuan rise bring more financial catastrophe than gain?

Please download here: ChinaDaily_2010.7.29.pdf


Since late June, when Beijing reintroduced a floating exchange rate for the yuan, the latter has appreciated about 70 points against the US dollar while many welcomed an end to the renminbi peg against the dollar, with Western economies being particularly appreciative of this, the said end came at the cost of domestic exporters and manufacturers. It is thus no surprise that the People’s Bank of China (PBoC) is now trying to restrain the pace of revaluation to minimize its negative impact on exports.

The renminbi is gradually raising its global status. Given this fact, Beijing should consider very carefully the development of an optimal exchange mechanism, before the Yuan is internationalized. On July 22 Wang Yong, a professor at a training academy sponsored by the PBoC, suggested the following in a Shanghai Securities News article: China should expand the renminbi daily trading band from 0.5 percent to one percent in May 2011, and two percent after 2015, to increase exchange fl exibility, and to minimize the PBoC’s intervention on the exchange rate.

The renminbi daily trading band was set at 0.3 percent when the floating exchange rate was first introduced in 1994. It was expanded to 0.5 percent in May 2007 to allow greater daily fluctuation. Wang’s suggestion supports the ... even with the expansion of the daily trading band, market players should not see the increment as a signal of rapid renminbi appreciation.

PBoC, in that it advises the bank to devise a mechanism that helps stabilize the exchange rate, which would be determined by market supply and demand.

The PBoC, which has been committed to supporting a stable, long-term floating exchange rate, has rejected the possibility of a hurried renminbi revaluation. However, even with the expansion of the daily trading band, market players should not see the increment as a signal of rapid renminbi appreciation, because a joint floating rate system guides the whole process.

The Plaza Accord of 1985 and the subsequent rise of the Japanese yen resulted in disastrous shocks to Japan’s export-dependent economy. The phenomenon altered the country’s economic structure, contributing to the growth and plunge of property and stock markets. Nations should take citizen interest into account when they design policies that apply to currency. I believe that a rapid renminbi appreciation could hurt exporters, who are now dealing with increased labor costs.

Rigid exchange rate regimes have proven to be fragile and tenuous, especially during times of financial crisis. However, we should not hope for a free-floating renminbi before the currency can be freely exchanged in open markets. The road to renminbi reform will not be easy, particularly in today’s treacherous financial jungle The PBoC should, as usual, tread carefully to minimize the shock to the country’s economic system.


China needs alternative drivers of growth

At the ceremony marking the 30th anniversary of the Shenzhen Special Economic Zone, Chinese President Hu Jintao made explicit reference to the importance of reforms, “... be unshakable in deepening reforms, raise the scientific c nature of reform decisions, and enhance the compatibility of reform measures, comprehensively promoting reform of the economic system, political system, cultural system and social system, seeking breakthroughs in important sectors and at critical points.”

Learning from the former Soviet Union, the world’s first socialist state, China has carefully studied the threat of promoting unilateral reform without the proper supporting political reforms. Unilateral reforms could easily raise the threat of social unrest and endanger the livelihood of the majority. In Russia, implementing radical political reform on an inefficient economy and an unprepared society proved to be disastrous. Furthermore, the complete acceptance of Western standards in terms of economic reform was even more devastating. In Russia’s case, GDP was chopped almost in half and poverty spread like a disease. For almost a whole decade, the majority of Russians had to bear the bitterness of the “Shock Therapy” policies introduced from the West while the resources and wealth were in the hands of less legitimate sources.

President Hu also emphasized “socialism with Chinese characteristics”, which specifies the uniquely active and cautious transformation of Shenzhen despite the challenge environment. China is reaching a crucial point where it is about to graduate to the next level of development, but each step demands extra caution.

China’s GNI (gross national income) per capita reached $3,620 in 2009, which is one level closer to a developed economy status. The World Bank defines GNI per capita below $995 as “lower-income economies” and China’s 2009 GNI represents a signify cant breakthrough and is approaching the ank’s classification of an “upper middle income” economy with GNI at between $3,946-$12,195. Reaching this threshold is an important achievement and the country needs to be careful as it takes its next steps. With the global economy still haunted by uncertainties, the country’s export driven economy calls for alternative drivers of growth.

Foreign direct investment (FDI) has helped to facilitate the country’s rapid growth, but recent numbers have seen a slowdown of FDI. Experts caution that FDI figures should not be used as a singular reference alone but in tandem with other economic parameters. The declining figures reveal a retreat of foreign capital as revenue prospects decline. In order to boost the domestic private sector, policy makers have been deploying measures aimed at aiding small and medium enterprises (SMEs) to help them gain market share, which was previously acquired by FDI enterprises.

Domestic demand is rising through both the spending of SMEs and the Central Government. Government expenditure has promoted significant growth following the 4 trillion Yuan stimulus package, in which a signify cant portion was directed to the property market. However, the Central Government is currently taking measures to gradually cool down the property market before it follows in the footsteps of Japan and the US. After 20 years, Japan is still struggling to deal with the effects of its burst property bubble. Meanwhile the US is dealing with the aftermath of the sub-prime crisis.

Alongside President Hu’s references to “socialist democracy”, support to SMEs is promoting economic stability through the diversification of the country’s economy, especially since exports have been the major GDP contributor at 39.5 percent of the total. SMEs also serve as a major source of employment, which in turn pushes domestic demand higher by increasing the average income of the labor force. The private sector tends to offer higher wages and can absorb the increase in labor from the agricultural sector, which in general pays less.

China is on the right path to becoming a developed nation through industrialization and policy reforms crucial for supporting its current economic reforms. SMEs are a major force which the Central Government should promote and continue to provide policy support to. This is needed in order to achieve a more diversified economy and to realize President Hu’s goal of seeking breakthroughs in “reforms”.


With government support, SME potential is vast

Please download here: ChinaDaily_2010.7.31.pdf


A recent marked deceleration in the mainland’s economy has once again placed the GDP growth figure under the spotlight. Official data released in July 2010 show that the country’s GDP growth has fallen to 10.3 percent in the second quarter, from 11.9 percent during the first quarter, following government efforts to slow expansion and prevent overheating.

Some expect the third-quarter GDP growth to ease further, as did the robust export figures of May and June, when exporters rushed to ship their cargo to benefit from export tax rebates, before their July 15 expiration. With a poor outlook for the US and European economies, many expect exports to decline in the coming months Against this background, the government should increase its expenditure and help boost domestic consumption to offset decline in exports and cooling in real estate.

To keep the wheel of the economy spinning, the government should continue to develop infrastructure projects nationwide and begin constructing public housing projects to boost the domestic economy, and provide social welfare to low-income families However, the private sector really should participate in the process to help the government expand our economy. The 2010 lending quota for the mainland banking system has been set at 7.5 trillion renminbi, about 64 percent (4.6 trillion renminbi) of which was given in loans in the first half of the year. Big conglomerates have used most of the amount. Few people have paid attention to the financing needs and importance of small- and medium-sized enterprises (SMEs). According to Zhang Jianhua, research head of the People’s Bank of China, there were actually fewer loans given to mainland SMEs during 2009.

The advantages of expanding the role of SMEs in the economy are obvious. Doing so would help increase employment, diversify the local economy and contribute to wealth redistribution, and eventually boost domestic consumption and the GDP. More important, if lending to SMEs increased, the extra liquidity in the financial system would be less likely to flow into inflated sectors, such as the property and stock markets. It would also help diversify the loan portfolios of banks.

In general, SMEs are having difficulty accessing finance because they lack collateral, and banks must satisfy regulatory requirements on strict capital-adequacy and loan-deposit ratios. The Central Government, however, could promote nationwide SME lending programs in the banking system, if it simplified regulatory ratios and limited loan sizes to minimize potential risks.