This year's Spring Festival Gala offered plenty of "crosstalk." Performers poked fun at each other with silly faces and playful jokes. Comic sketches have a long tradition in China, yet today's younger audience wants contemporary entertainment. To please everyone, the Gala producers broadened the show with skits referencing popular social topics. Though lighthearted, they give insight into the spirit, and anxiety, of the times. One act touched on problems with China's property market. If they were not already, all seven hundred million viewers are now thinking about the issue. And it is serious.
The landscape of China is dotted with excess. On two hundred acres of farmland in Dongguan, a developer built the world's biggest mall, with room for fifteen hundred stores. Nearly all retail spaces are sitting empty. In Inner Mongolia, the city of Ordos spent 17 billion yuan developing a district to house a million people. China Daily dubbed the new area, with a population of barely thirty thousand, a "ghost city." Reports have surfaced from Haikou of home prices leaping 20 percent per month and luxury resorts popping up like spring daisies. Not only are mega-skyscrapers under construction in cities such as Shanghai and Jiangyin, many more are in the pipeline. Ironically perhaps, state-owned Citic just bought land to put up Beijing's tallest tower.
The central government admits that serious imbalances have arisen in the property sector. In some places the concern is too much demand, in others too much supply. A common cause is too much debt. Developers are borrowing to build, while purchasers are borrowing to buy. When money is too easy and cheap, supply can balloon and prices can skyrocket. Comparisons to Japan's asset bubble of the late 1980s are flawed, yet some basic lessons apply. Like China, Japan eased monetary policy to counter a slowdown in export volume. But the government allowed sustained surplus liquidity to propel a massive rise in asset prices, and a severe crash followed. Demographics alone position China far better than Japan for long-term growth, but they do not preclude a major, near-term property slump.
To rebalance the economy, China must constrain real estate lending and overall liquidity. Policymakers are raising interest rates, making debt more expensive. They are requiring higher downpayments, forcing buyers to borrow less. These steps make sense. Also prudent is the central bank's decision to boost reserve requirements for lenders, which will rein in credit growth. To stem capital inflows and speculation, China is restricting property purchases by foreigners.
The question is not whether the government is using the right levers to control liquidity but whether they are pulling them hard enough. The voices of skeptics are growing louder, with many insisting that a collapse has become inevitable. If the property market seizes up, banks will experience sluggish loan growth and escalating defaults. Revenues will dive in such businesses as construction, development, steel, glass, and cement. Consumer confidence will erode. The entire economy will shudder. Construction has been powering much of China's expansion, and Harvard economist Kenneth Rogoff reckons GDP growth could sink to two percent without the current real estate buoy. A sharp slowdown in China could bring about a double-dip recession in the global economy, which would hurt China further in the form of lower exports. A bursting Chinese property bubble would certainly echo around the world.
Officials are hesitating to squeeze credit further for fear of going too far. They recognize that lowering the temperature of the property market will cool the whole economy. For two decades, the central government has fought to maintain at least 9 percent GDP growth. They have been spending and regulating to achieve that goal; however, reverse engineering like this poses risks. Markets do not perform evenly without considerable manipulation. Just ask Bernie Madoff, who struggled to uphold consistently high returns before resorting to a Ponzi scheme destined, inherently, to fail. Artificially propping up China's real estate sector may lead to a similarly spectacular failure. Policymakers must decide whether to accept slower growth now or risk a property-led recession in the years ahead.
By the time of the 2012 Spring Festival Gala, we may know whether the central government has the ability and resolve to steer the economy clear of trouble. If not, that year's crosstalk will not get as many laughs.
The landscape of China is dotted with excess. On two hundred acres of farmland in Dongguan, a developer built the world's biggest mall, with room for fifteen hundred stores. Nearly all retail spaces are sitting empty. In Inner Mongolia, the city of Ordos spent 17 billion yuan developing a district to house a million people. China Daily dubbed the new area, with a population of barely thirty thousand, a "ghost city." Reports have surfaced from Haikou of home prices leaping 20 percent per month and luxury resorts popping up like spring daisies. Not only are mega-skyscrapers under construction in cities such as Shanghai and Jiangyin, many more are in the pipeline. Ironically perhaps, state-owned Citic just bought land to put up Beijing's tallest tower.
The central government admits that serious imbalances have arisen in the property sector. In some places the concern is too much demand, in others too much supply. A common cause is too much debt. Developers are borrowing to build, while purchasers are borrowing to buy. When money is too easy and cheap, supply can balloon and prices can skyrocket. Comparisons to Japan's asset bubble of the late 1980s are flawed, yet some basic lessons apply. Like China, Japan eased monetary policy to counter a slowdown in export volume. But the government allowed sustained surplus liquidity to propel a massive rise in asset prices, and a severe crash followed. Demographics alone position China far better than Japan for long-term growth, but they do not preclude a major, near-term property slump.
To rebalance the economy, China must constrain real estate lending and overall liquidity. Policymakers are raising interest rates, making debt more expensive. They are requiring higher downpayments, forcing buyers to borrow less. These steps make sense. Also prudent is the central bank's decision to boost reserve requirements for lenders, which will rein in credit growth. To stem capital inflows and speculation, China is restricting property purchases by foreigners.
The question is not whether the government is using the right levers to control liquidity but whether they are pulling them hard enough. The voices of skeptics are growing louder, with many insisting that a collapse has become inevitable. If the property market seizes up, banks will experience sluggish loan growth and escalating defaults. Revenues will dive in such businesses as construction, development, steel, glass, and cement. Consumer confidence will erode. The entire economy will shudder. Construction has been powering much of China's expansion, and Harvard economist Kenneth Rogoff reckons GDP growth could sink to two percent without the current real estate buoy. A sharp slowdown in China could bring about a double-dip recession in the global economy, which would hurt China further in the form of lower exports. A bursting Chinese property bubble would certainly echo around the world.
Officials are hesitating to squeeze credit further for fear of going too far. They recognize that lowering the temperature of the property market will cool the whole economy. For two decades, the central government has fought to maintain at least 9 percent GDP growth. They have been spending and regulating to achieve that goal; however, reverse engineering like this poses risks. Markets do not perform evenly without considerable manipulation. Just ask Bernie Madoff, who struggled to uphold consistently high returns before resorting to a Ponzi scheme destined, inherently, to fail. Artificially propping up China's real estate sector may lead to a similarly spectacular failure. Policymakers must decide whether to accept slower growth now or risk a property-led recession in the years ahead.
By the time of the 2012 Spring Festival Gala, we may know whether the central government has the ability and resolve to steer the economy clear of trouble. If not, that year's crosstalk will not get as many laughs.
