China;China's economy;Not with a bang;
China's property prices and its local-government debt have started rising again. That may be a good thing
FangZhuang, a high-rise neighbourhood tucked inside Beijing's third ring road, was one of China's first commercial housing projects. Its four divisions share a park, schools, a courthouse and a Carrefour supermarket. Characters in the divisions' four names combine to mean “stars of the ancient world”. Back in 1990 Fangzhuang flats sold for about 1,500 yuan (234 Dollar at today's rate) per square metre, according to Credit Suisse, a bank. Since then, prices have reached for the stars of the modern world, exceeding 30,000 yuan in that part of Beijing.
China's unruly property market was once dubbed, with excusable hyperbole, the “most important sector in the entire global economy” by Jonathan Anderson, then at UBS, another Swiss bank. It remains the biggest fear hanging over the world's second-biggest economy. Home prices began falling about a year ago. The declines have depressed investment and curtailed economic growth, which slowed to 7.6% in the second quarter, its slowest rate since 2009.
The only economic anxiety to rival property is local-government debt. Estimated at 10.7 trillion yuan at the end of 2010 by official auditors (and a lot higher by unofficial ones), much of it was held at one remove by so-called local-government financing vehicles. When one such, Yunnan Highway Development and Investment, told creditors in 2011 that it would not repay the principal on their loans, it was described (with equal hyperbole) as the “default heard around the world” by Business Insider, a news website.
Both worries have roots in the stimulus spree on which China embarked in November 2008. State-owned enterprises began bidding enthusiastically in land auctions, and local governments let their pet projects run wild. Ever since, the two problems have preoccupied China's central government. In April 2010 it put curbs on speculative homebuying and spent much of last year tidying up local finances. This spring, Wen Jiabao, the prime minister, boasted that local-government debt had grown by a mere 300m yuan in 2011.
Signs, however, are growing that both property prices and local-government borrowing are rising again. China's National Bureau of Statistics (NBS) reports that new home prices rose in June in 25 of 70 cities it tracks. They fell in only 21. Sales volumes also strengthened. Prices are still lower, on average, than a year ago. But according to our weighted average of the (new and existing) home prices reported by the NBS, the pace of decline appears to be bottoming out (see chart). By next month (thanks to a lower base), prices may be rising again, year-on-year.
Local governments meanwhile have been given leave from their debtors' prison. Reports suggest that China's banking regulator has told banks to increase lending to “better qualified” financing vehicles. These vehicles have also increased their bond sales, issuing over 420 billion yuan-worth of paper already this year.
These twin turnarounds might be good news—a sign that property prices have stabilised and local governments have restored their creditworthiness. But they could also be signs of desperation, evidence that the central government has lost its nerve in the face of falling growth.
The rise in local-government borrowing is something in between: a defensible response to a worrying slowdown. China's economy does need help, and its government has ample scope to provide it. Some local governments took on more debt than they could handle. But their liabilities never endangered the fiscal position of the country as a whole. The combined debts of China's central and local governments add up to about 50% of the country's GDP (including bonds issued by the Ministry of Railways and China's policy banks, intended for state-directed lending). Even if local debts are understated, China has fiscal room for error. Local governments will also borrow less and invest better than they did in the previous stimulus effort, argues Peng Wensheng of China International Capital Corporation, a Chinese investment bank. “The pressure for policy easing is much less now than it was in November 2008,” he says.
The rebound in the property market is harder to interpret. It may also reflect a misreading of government policy. Some local governments have eased property curbs surreptitiously, hoping to revive construction jobs and land sales (and thus their revenues). The central government is also keen to encourage first-time homebuyers. But it insists that it will still strictly enforce existing curbs on people, especially out-of-towners, buying more than one home. This week the State Council, China's cabinet, said it would send inspectors to 16 cities and provinces to curb backsliding.
Yet in most cities, says Jinsong Du of Credit Suisse, it is ever easier to circumvent the rules. He cites one high-profile launch in Shanghai where the flats went for 3m Dollar each. Even the estate agents on site admitted that most buyers already owned several other properties.
But surely if China's property market was a burst bubble, even a forthright relaxation of controls would not reflate it? After America's property prices began falling in earnest, policymakers tried in vain for years to revive them. Japan has been trying to perk up prices for more than 20 years.
China's property dynamics may differ, however. In many asset bubbles, prices are pushed up by greedy investors, who borrow heavily to buy. When their creditors get nervous, they default or dump their assets. These fire sales quickly feed on themselves. But China's property-buyers are often wealthy firms and individuals looking for somewhere to park their savings. Certainly, they see property as an investment. But they do not necessarily expect prices to go through the roof. Give them any prospect of beating inflation in the long run, and they will buy. China, after all, offers few other options.