One of the key problems with hoping that the Chinese government cools China’s property bubble is that government officials have been feeding off of the bubble for so long now.
It’s their lifeline.
Powerful interest groups have paralysed China’s macro policy, with ominous long-term consequences. Local governments consider high land prices their lifeline. State-owned enterprises don’t want interest rates to rise. Exporters are vehemently against currency appreciation. China’s macro policies have been reduced to psychotherapy, relying on sound bites and small technical moves to scare speculators. In the meantime, inflation continues to pick up momentum. Unless the central government bites the bullet and makes choices, the economy might experience a disruptive adjustment in the foreseeable future.
Three reasons he gives for why the government is under massive pressure to simply let the bubbles keep expanding:
1) Local governments have become dependent on income from the property sector as profits in manufacturing have come down, yet the need for local government spending keeps increasing. ‘The real revenue game has shifted to property.’
2) Most of the debt in mainland China is in fact that of state owned enterprises. ‘Keeping interest rates exceptionally low has become a national policy for protecting the state sector.’
3) Chinese exporters are in rough shape due to still-weak global demand plus rising labour and regulatory costs locally. ‘They are vehemently opposed to currency appreciation.’ (Which many believe is needed to reduce speculative inflows
China’s policies have traveled the path of least immediate resistance – monetary expansion and asset inflation. The main purpose behind asset inflation is that the government can tax it. It provides a place for people to chase their get-rich-quick dreams and is popular as long as the market goes up. It also offers insiders who have disproportionate influence to play the game at the expense of little people. It is no coincidence that China’s policies have been so pro-asset-inflation in the past few years.
Basically, if China actually cools its asset market bubbles as it ostensibly intends to, it could then be faced with a fiscal problem, in addition to others.
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