Residential property prices in China are collapsing at a faster rate than in the US post-Lehmans, or – to put it a bit less excitedly – by 5.7 percent in the year to February. So what was a RMB1,000,000 apartment a year ago now goes for around RMB950,000. An innocent bystander might assume that, after surging in 2010 and 2013, prices are simply peaking, so no big deal. But as we all know, a property market is a slow, lumbering beast, and when it starts plodding downhill it can keep going, however slowly, for a very long time.
One of the perplexities and perversities of modern life is that when the cost of food, fuel, clothing, phones or medicine comes down, it’s a Very Good Thing, but when home prices fall, it’s a Very Bad and Scary Thing, at least for a lot of people and many policymakers. The main reason is that it suddenly becomes clear with a massive Doh! that developers and buyers have borrowed crazy amounts of money they can never repay, and banks and the economy face ruin. In addition, China has a system (suggested in the late 1970s by a young Hong Kong patriot/property agent called CY Leung) whereby local governments rely on land sales for revenues needed to pay for public services.
The feeling of impending doom grows stronger. China is sitting on a mountain of bad debt. (How big is ‘a mountain’? No-one’s sure.) One in five urban apartments in the country is sitting empty. (Maybe. Again, nobody’s certain.) We are also told that the property sector accounts for 15 percent or 20 percent of national GDP. (Which is putting the cart before the horse, like arguing that Hong Kong ‘relies’ on Mainland tourists because there are so many of them. A worthless, destructive activity accounts for a fifth of your GDP, therefore it’s vital.)
Note the key common theme running through all this: no-one has a clue. Even basic indicators like GDP growth and inflation are falsified in China, so forget reliable data on non-performing loans or overcapacity of housing stock. Most agree, however, that there is a really huge, serious problem.
So what happens? Why of course – the stock market booms. People have been muttering about the country’s property market bursting, falling or at least subsiding for well over a year. The scarier things look, the higher the stock index goes. The government can’t/won’t allow a mega-collapse, everyone assumes, so it will bail out/stimulate as much as it takes to prop it all up, which translates into more money sloshing around, which will get invested in equities for lack of anything else, so buy now.
A few years ago, chattering Davos types started talking about a ‘Beijing Consensus’. There was a ‘Washington Consensus’ with liberal democracy and free markets, which was a discredited and exhausted joke after the financial crisis broke out in 2007. Now, China was showing the world a new way, with oh-so professional and purposeful authoritarian rule enabling and guiding smooth economic growth that avoided all the bubbles and volatility and waste and the Doh! stupidity you get with the wrecked old Western system. Oh well, nice idea. The reality: China’s policymakers can’t think of anything more original than debt-fuelled bubbles and bailouts and monetary stimulus, after all.The reality: China’s policymakers can’t think of anything more original than debt-fuelled bubbles and bailouts and monetary stimulus, after all.
This is a long way of adding to the debate about the famed David Shambaugh essay. With state secrecy and quite possibly ignorance in place of dependable public statistics, any kind of analysis can only be guesswork. Two things we can be sure of are that in China the same rules of economics apply as elsewhere, and the leaders do not seem to have any new ideas.