It Is Easier for the Chinese Economy to Break

Author(s): Translated by Yu Hua

Source: CSSN

Away from the Over-reliance on Real Estate in Words than in RealityYin Zhongli Judging from the past, the central government will relax the controls on the real estate market while economic growth is slowing down. But something seems different from usual this year: since the beginning of the year, economic operations have been slowing down in an obvious fashion, but the central government has been emphasizing that property control policies won’t be shaken. What makes the markets more surprised is that the GDP growth in July fell below 8%, while the central government still sent inspection teams to different regions to check how they carried out the regulations of property control policies.

This seems to suggest that China is choosing a new direction in macro economic decision-making, and “breaking away from the over-reliance on real estate” has become a new consensus. In the past ten years, the economy has grown rapidly relying on the development of the real estate market, and a perfect combination of “high growth and low inflation” was created. But the consequences were also very serious, mainly in the following aspects: first, the structure of income distribution worsened badly and the rise in land prices stripped residents of their wealth. Second, the rapid rise in land prices not only led to the costs of industry and services increasing substantially, but also caused resources to be concentrated on the real estate market. Third, it has become more difficult to keep the society in stability and the contradictions over land have become more and more sharp.

Chinese economic operations which rely excessively on real estate contain a great risk. Looking at the successful cases of Japan and South Korea, two points are crucial for the Chinese economy to achieve sustained development. One is to rationalize the income distribution. The other is to improve the ability for independent innovation. In order to do both of these, the rise of real estate prices must be curbed.

However, it is more difficult for the Chinese economy to break away from the real estate in deeds than in words. Once land prices stop rising, a series of chain reactions will occur, which will have a tremendous impact on the economy and finance. Since the 3rd quarter of last year, with the slowdown of the growth rate in real estate investment, there has been a dilemma of overcapacity in some industries such as steel, cement, coal, petrochemicals, household appliances and so on, with the growth rate of the economy falling below 8%. In my opinion, this is just the beginning of a series of “bad news” items, with more challenges ahead.

Why is the decline in real estate prices so destructive for the Chinese economy? To understand this, the logical relationship between the Chinese economy and the real estate market should be made clear.

In the past ten years, house prices in China have been rising almost without stop. In fact, there have been similar phenomena in Japan and many South-eastern Asian countries. Experiences from these countries show that house prices may not just fall, but fall dramatically. And the more they rise at first, the more they fall later. There is the same logic behind the house prices rising in all these different countries: Export surplus promotes a domestic credit expansion and a credit expansion stimulates an investment expansion. And then the investment expansion increases residents’ income, promoting the rise of real estate prices. But if an investment expansion leads to overcapacity, international capital will begin to withdraw, and all signs of prosperity will disappear.

Overcapacity and the falling of house prices are in reciprocal causation. With overcapacity, both product prices and corporate profits will decline. What’s more, wage income will decrease and employment will worsen. All these result in the falling of real estate prices, which may make overcapacity more serious with both real estate investment and the demand of products such as steel, cement et al. reduced.

At present, while overcapacity appears common in the Chinese industry, the real estate prices are rather stable. That’s because house prices are not believed to fall when they keep rising too long, and developers’ “sales price” immediately attracts a lot of investors’ panic buying. When house prices really start to drop, overcapacity will be more serious and the economic growth will further slow down.

Now the Chinese economy is facing a great challenge. In my opinion, only by adhering to “breaking away from the over-dependence on real estate” and trying to adjust the economic structure will the Chinese economy have a promising future.

（The author is a research scholar with the Institute of Finance and Banking, Chinese Academy of Social Sciences. The article in Chinese is from Economic Information Daily.）