By Minxin Pei
If the bubble bursts, will the culprits pay for their sins?
Not necessarily. Local governments will lose revenue and the ability to use inflated land as a means to raise bank loans. But when their access to funds generated by the real estate bubble is cut, local governments will most likely do two things—they’ll cut back on their wasteful investments in infrastructure and prestige projects and also reduce local services, thus hurting ordinary people. Local government officials themselves shouldn’t be expected to go on a strict diet of fiscal austerity. In all likelihood, they will continue to enjoy their generous perks.
State-owned enterprises whose real estate projects have gone bust will not pay a price, either. None of them will be forced to pay back the bank loans since, in the eyes of their executives, paying back loans from state-owned banks is like moving money from one pocket to another—not exactly a very meaningful exercise. As before, bad real estate loans will be written off. It’s a Chinese version of ‘heads I win, tails you lose.’
So who will foot the bill for the anticipated collapse of China’s ‘bubbly’ property sector?
Unfortunately, China’s taxpayers will twice be made the victims by the housing bubble. In the bubble years, they are priced out of the market for affordable housing. When the bubble bursts, they’ll pay for the clean-up. When Chinese state-owned banks write off their bad loans, they don’t do so with money growing on trees. Instead, the Ministry of Finance will issue special-purpose bonds to recapitalize the banks—and fund the bail-out with future tax receipts.
Many Chinese officials often claim that China is exceptional. In this case, they may have a point. In the West, greedy capitalists cause bubbles; in China, greedy communists do.
MinxinPei is an adjunct senior associate at the Carnegie Endowment for International Peace and a professor of government at Claremont McKenna College
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len-nin
One of the flaws with the property market in China is that the central government wants the inflation down as well as property price but refuses to let the market correct itself from the speculators. The reversal in money tightening policies is, arguably, too soon … It is letting speculating developers and buyers off the hook. It should let the speculator go bankrupt en masse. The government shouldn’t worry too much about those who bought apartments at a high price and not letting them lose de to reducing property prices. And it mustn’t worry too soon that a downturn in property market will kill China’s economic boom and therefore a need to re-boost the property market again. You can’t have your cake and eat it. You have to go with the cycle. It’s about managing the cycle. Rest assure the property market prices goes down slowly but shoots up immediately when the market senses speculative killing to be made. And the market are all the consumer market who have money. WHile this is all theoretical and the government have to deal with the real world, I strongly endorse the government building low costs apartments by the millions. It is something they should have done this long ago to manage the supply and demand so that property – land and apartment – prices can be managed macro-economically.
In many ways, this episode reminds me of the Far East Asian countries opening up their economies in the 1990s to hot money but haven’t the controls in place to handle the massive inflow and outflow of billions of hot money into their stock and property markets from Wall Street. In this regard, the central government failed to understand the need to put controls in place even as they allowed the mad rush to expliot the potential wealth to be reaped from property development. A C- for them but better late than never in preventing a radical burst of the bubble.
Frankie Fook-lun Leung
You under-estimate the chinese government’s capacity to solve real estate vacancy problems. About twenty years ago, the Pudong region of Shanghai was over-developed with many high-rise buildings being vacant. The Chinese government gave an order that any foreign banks which did business in Shanghai had to have an office in Pudong. Now Pudong is the region with so many foreign banks having offices and that initial movement subsequently attracted other enterprises foreign and domestic to gravitate towards that area.
Frankie Fook-lun Leung
The on-going debate on china’s hard or soft-landing is somewhat misplaced. The commentator is predicating his observation that china’s economy follow a market economy pattern. There are cycles. China’s economy is by their own admission is a socialist economy with chinese characteristics. Therefore, using conventional western economic analytical tools may not be the right instruments. Then, what should we use. Nobody has yet come up with a credible answer.