CHINA HEADING FOR JAPANESE STYLE REAL-ESTATE BUBBLE
I also hereby state that this work has not been provided or accepted for any other previous or concurrent degree.
Acknowledgement
I would like to convey genuine appreciation to my committee chair who inculcated in me motivation towards research and scholarship and eagerness in regard to acquiring wisdom and judiciousness. Without hisher consistent guidance and assistance at every step my feat for accomplishing this dissertation would not have materialized.
I would also like to thank . Or . whose rationalization helped me immensely in building my own department of judgment and vindication, while analyzing global economic paradigm. They had introduced me to the factual realm of comparative analysis and underlying structures determining the course of economic policy domain, influencing directly on the fate of nations.
Lastly I am thankful to those individuals who name have not been mentioned, my friends and colleagues who together made the process of research an enjoyment and success. I believe that my stay may not have been exceptional without their acquaintance and support
Scope and Objective
The scope of this paper is to analyze course of events transpiring in Chinas real-estate market and comparing it with circumstances befalling in pre and post-Japanese housing crisis. It deals with investigating the underlying explanations concocting underneath the policy realm of both states. Under the purview comes policy orchestration, implementation and subsequent implications, those have helped in the manufacturing of unstable economic excesses.
And by way of analyzing policies and subsequent practices, the research tends to particularize and predict outcome of Chinas policy application and in gauging the prospects of countrys real estate slide whether ending in boom or bust.
Abstract
This dissertation deals with analyzing factors those contributed to the Japanese real estate bubble, measures taken by its government to flatten it and comparing that scenario with Chinas circumstance to gauge the future of its real estate. Chinas favorite tool of proactive fiscal policy has been successful but how far does its stimulus package goes in fomenting or abating the real estate doom and gloom prognostication remains to be seen. In such state what could be done and what possibly would be the outcome is the real question The paper thus approaches and analyzes these intriguing arguments by systematic exploration of Chinas past practices, present plans and possible future course of action by conducting scenario comparisons. The correspondence in this regard is made with the Japanese real estate debacle because of the similarities in Chinese and Japanese housing market configuration. This analysis has yielded two sided views about the future of Chinas real estate sector. It could or could not get worse and reason for such ambivalence lie in shroud of Chinas surreptitiousness in releasing true figures, clear policy lines or their future courses. However the argument tilts more in the favor of China ultimately containing the mortgage death spread, as has done and been successful before. Reasons being despite of all the strides made by countrys policy makers in opening and liberalizing countrys economy, it fairly still is considered to be a controlled economy with reigns tightly held by the center, and unlike the Japanese or US markets China wont allow its economic construct to sway dangerously into unmanageable territory. They would preempt to secure and rescue the economic miracle that they tried hard to accomplish.
1. Introduction
1.1 The Global economic seething an overview
Twenty first century though commenced with fervor of prosperity and success suddenly despite under the ruse of complex forecasting models, rules and stringent regulations it fractured to expose the faltering underlying cleavage that runs through the entire world. While such crisis cannot be halted altogether, the crux of redressing the current problems should be to cripple the momentum and magnitude of the next financial catastrophe. Thus any intention behind the transformation of economys body language should be Better Regulations along with strict implementation rather then the tirade of more rules. Especially the realm of Micro-Regulations in Base 2 should be added on with Macro-Regulations that honors the phenomenon of developing through the roots rather then form superficial surface.
Looking at the Global horizon one can see conflicting zones of Surplus and Deficit economies (former excessive saving is held to be the cause of low interest rates, the case of massive liquidity and thus an impetus for degenerated credit quality) A vicious cycle of money being poured in by the tech adopting world exploding economies into deficit black holes thus giving rise to high corporate savings which were unable to balance out the surging deficits, this chain of events lead to severe Global capital Imbalance. Clearly deficits on such massive scales are unsustainable as since the collapse an estimated 27 trillion has been wiped out of the Global stock market (Bramble 2010). This crisis undoubtedly is the result of human excesses but the preceding reforms, restructuring, reallocation and realignment are continuous processes that should not be stopped. It tends to make us focus and think of different facades of disruptive trends generated over the years through short windows of opportunity that lasts until the pain, but soon as it closes the resurgence of vested interests again takes the reformed body over to seep and infect, start paving way for the next paralysis.
World has seen more then Hundred Banking crisis but each time these are the bankers who are chided, emergency plans are put into place to cover the loop holes and the story starts over again without identifying and erecting the fundamental flaws that unfurl the fault lines again. The current quagmire is just an extension and re-happening of the recurring yet inevitable boom burst cycle. These are the banks that render successes and yet fail the Capitalist structure, thus protecting them is not only vital for the health of any financial system but its failure bodes evil for the entire world.
1.2 Background The China context
China is an emerging economic power and the manufacturing powerhouse of the new century. With consistent high economic growth and enormous reserves this is among the few major economies of the world that fared well in Global economic crisis. With new rules and regulation to ease the economy necessary to contain the slowdown contagion it is pertinent that it does not fall into same trap that Japan and later US become victim of. With massive capital injected into economy by the government under stimulus package, accompanied by foreign and domestic investments China stands at the cross road of cultivating Japanese style real estate bubble. The country has experienced a continuous rise in housing prices since 2003 and while the government had been successful in containing steep rise through measures taken in 2007, recent trend reveals that property prices are again experiencing an upward trend (Dyer 2010). Despite the carefully orchestrated Proactive fiscal policies and stimulus package, the government has not been completely successful in checking the flow of hot money into the real estate business. Whether the current trend would overwhelm Chinese measures or would the government be able to impede overheating stakes are high as any miscalculation or strayed stratagem would have profound impact on Chinas economy in particular and by virtue of its size on world in general.
1.3 Overview of Dissertation, the flow
The trajectory Chinas real estate sector followed has got clear resemblance with Japanese housing boom. In contrast to the US subprime market development and eventual demise, Japanese and now the Chinese markets have mostly stayed in the luxury real estate segments. Development of the Japanese housing bubble have clear lessons for Chinas policy makers who can focus on four distinct phases through which the contagion grew, spread and rot. One of the main reasons that intensified the death spread has been the initial ignorance whether deliberate or by sheer lack of understanding on part of the Government to act in timely manner.
First they let the bubble to grow to some this is the mistake that China is committing (Fried 2010) by not pulling the regulatory reigns in time and secondly lethargic response in wake of the spread because of the lack of comprehension about possible dire repercussions. Hence focus on Chinas recent and existing spate of policies needs to be looked at thoroughly. How the so-called proactive fiscal policy have fared since its inception and how it achieved its two pronged objectives of spurring the economy necessary for countrys development while containing possible market blights from blowing out of proportions needs to be investigated (Fried 2010). After getting an insight it then becomes possible to compare and contrast Japanese remedial course of action and the Chinese position. Though there are conflicting and starkly diverging views about the possible aftermath of real estate miracle but given Chinas over-conscious track record in the realm of economy that directly influences its social tranquility it is preposterous to expect that policymakers in Beijing would be caught unguarded. In this respect policies implemented during 2007 proved successful in keeping the economy from over-heating, however with the start of global financial crisis and drastic fall in Chins export, it rather stuck into paradoxical situation, where cooling-down policies suddenly begun to negatively effect the economy. Beijing suddenly retorted to high gears but this is where the problem lies. As the data shows large amount of money from the home grown stimulus package and abroad has begun to flow into housing market again, and this trend is being spurred by local government as their other sources of income got constrained (Hugh 2010). How the Central government counter hot-flow into single segment of economy while keeping the source of income open for local government remains to be seen. Could there be a balancing act and how successful would that be
1.4 Literature Review
Though several correlations are being engineered in various newspapers and economic magazines by various commentators, but no proper research has yet accounted genuine similarities and differences between the two situations. One such attempt has been made by Ozeki (2009) in which he has compared the prospect of Chinese real estate market and its comparability with the Japanese housing demise. He has stated marked differences in the growth pattern of both economies, where the Japanese economic boom is slated to have been spliced with real estate upturn while Chinas economic progression has been the result of diversified factors. However there are others who contest these claims and tend to look at the market growth in different way, Takatoshi (2010) a professor of economics express his doubt about the rate at which property prices in China has peaked. He also sees similarity in trend as he claims that, in Japan housing prices grew exponentially first in the urban-heartlands and then spread in the first and second tier sub-urban counties. The same trend is being seen in China too where the residential and commercial prices are skyrocketing in urban centers like Shanghai, Beijing and Shenzen, and now they have begun to spread to Hangzhou, Wushi, Suchou.
And despite governments efforts since the onset of Global financial crisis Chinese housing prices rose with largest margin in Feburary this year, promoting fear that situation have gone out of control and the market is on its way to collapse (Anderlini 2010). In this context Jamil (2010) point towards brewing conflict of interest between the central and regional governments where the Prime Minister asks for curb on banks real estate lending while local representatives requests otherwise as they consider housing sector to be at the center of their revenue streams when all other sources have scorched. Yuchang (2010) who is the secretary general of CREA has advised the balancing out act, where the government would clamp market speculations by tightening space for real estate speculators as it also attempt to keep doors open for its citizens to do legitimate property buying. Zhang (20100 also marked startling resemblance by commenting that in Manhattan the vacancy rate after the Mortgage crisis has been around 10 whereas the same rate in Shanghai downtown Pudong district hovers around staggering 50, although no such real estate fissure has yet emerged in China. Such vacant spaces are visible even when Shanghais annualized property prices are rising by more then 60 (Anderlini 2010). According to other source, the price hike is not just confined to Chinas three prominent cities rather its spread is quite wide i.e in just last month (February 2010) real estate prices of Chinas seventy largest cities rose by a record 10.7 as compared last years increase of 9.5 (Anderlini, 2010) and such price hike is across the board i.e encompassing both the residential and commercial housing. Gao (2010) has stated in his recent analysis that such sharp increase in housing price is going to put profound impact on Communist party standing, when the potentially explosive younger section of society would start feeling homeless as their salary increase does not match with the cost of property increases. Talking of the property reforms that are direly needed to clamp real estate from taking the rest of economy hostage, Dyer (2010) in his publication claims that powerful property tycoons in collaboration with local government officials have till now been able to put up a tough fight against implementation of property taxes, that tells the story of the corrupt enigmatic set-up hiding under the greater communist turf. Chovanec (2010) further explains such a step as something very sensitive, Beijing would have to walk a real tight rope by conducting critical cost-benefit analysis as taxes undoubtedly would pave way for additional revenue stream for government while flattening the rising bubble, but its a double edged sword as observed at several places where taxes acts as detrimental agent in inducing slum in regions economies those who had earlier relied on property development.
3. Arguments and Analysis
3.1 Japans economic crisis
The subprime crisis triggered by the collapse of housing market resemblant to Japanese housing collapse of 1990shas lead all the major economies of the world US, EU, China etc to extend government support to economys critical sectors and financial institutions. In this context Japans debacle in dealing with inimical loans and atrocious financial sector gives the world a perspective about the extended public support. Here an insightful analysis of housing Japanese crisis is performed followed by comparison with Chinas current bubbling scenario while considering ramifications for the government actions.
Japans financial crunch
The economic stagnation in Japan persisted for nearly fourteen years from 1991 till 2004, though considered to be the lost decade in countrys history but throughout this period the crisis crystallized into forms that got manifested into different states of market (ozeki 2009). In order to understand the brewing bubble in China we first have to look at the way Japan got embroiled into the housing quagmire. On broader terms the moment Japanese real estate bubble busted till it recovered 14 years in total, countrys economy went through four expansive phases.
3.1.1 Phases to recovery
Phase 1 1991-1994, this was the period when Japan went through economic debacle, the housing bubble collapsed and its shock waves deluged the entire financial system. The government acted in typical fashion by coming up with stimulus packages to rouse the deteriorating trend.
Phase 2 1995-1996, warnings of significant financial frailty began to surface. And at the time when the whole banking system was collapsing Governments weakness to come up with robust counter-measure took to toll to highest levels. Later assessments holds policy makers responsible for letting the economy to nose-dive as the approach adopted by them had been over conscious and cumbersomely calculated. Inaction for orchestrating an aggressive and comprehensive policy package lead the damage to ferment and infect rest of economic sectors (Ozeki 2009).
Phase 3 1997-1999, the defaulting of countrys major banks triggered prompted the economy to get into financial emergency mode. The government turned in fabricating emergency laws and budgeting initiatives that lead her to over take failing banks into quarantine, while injecting taxpayers money into vital sectors or independent institutions to contain the contagion on first place and saving the national entities that had been established over several decades from dissolving altogether. As such a rescue was pertinent restrain massive lay offs crucial for maintaining social rest.
Phase 4 2000-2004, this was the period when all the measures and their gains obtained over the past whole decade reversed as burgeoning debts obtained by larger corporations lead the economy back into cold-storage the tipping point. Takenaka Plan initiated the disposal process of non-performing loans with the injection of massive public money into banks Resona bank finally lead the crisis to its end (Ozeki 2009)
3.1.2 Significant aspects of Japanese bubble
Japanese economic bubble was direct outcome of extraordinary expansion of its commercial real estate enterprise. According to the statistics of the Bank of Japan real estate individual loans only made up 20 of the gross credit growth while the bad debts that the Government had to deal with after the bubble burst was solely cluttered in commercial real estate market (ozeki 2009). Over zealous speculative environment was created when big investors those in most cases were borrowers of huge sums across the nation in the pretense of building commercial structures, expansive golf and race courses, had made extraordinarily hypothetical purchases of commercial properties with the expectations that land prices would further rise (Mera 2000). In comparison to what had been happening on commercial side the accumulation of bad debt on residential real estate usually obtained by small investors or ordinary citizens was limited. After the collapse of Japanese housing bubble country continued to reel through bad debt predicament for 15 years that had been the result of various factors peculiar to Japan. The most significant was the occurrence of housing boom that happened after the country had passed through high growth period that tells that the economy had already passed through peak in housing real demand. Inferring that the whole real estate boom specter was unfounded i.e not substantiated by any real demand (Mera 2000)
Secondly the price of real estate was based on total speculation as it quintuple in extremely short period (from 1985 and 1991). All this followed by discrete increase in businesses leverage spectrum that occurred as a result of massive land acquirement and superfluous capital spending (Ozeki 2009) . Thus when real estate bubble flattened it virtually crumbled foundations across the whole corporate sphere.
3.2 Chinas circumstances
There exists striking divergence on some aspects and convergence on others the way Oriental and Nippon economies fared through their respective boom periods. Chinas real economy has followed quite a distinctive trajectory as compared to any growing economies of the world today i.e it has gradually but successfully blended the best fruits of socialism and capitalism, of free and controlled market economies to form a hybrid system that is both resilient, robust and steerable. Its relatively smooth and unhindered performance has given rise to a notion that this country is going to enjoy hilarious growth rate for long time to come (Naito 2008). Furthermore the type of real estate demand that exists in China shows marked difference qualitatively compared to its counterparts in US, EU and Japan. Studies conducted in PIMCO lead analysts to believe that Chinas express growth and the subsequent transformation in her socio-economic domain are systemic relocations that would stretch through a hundred year cycle (Ozeki 2009).
It has been identified that Chinas sluggish growth before her embracement of the economic liberalization initiative had been her enormous scarcity of the residential property that was required to meet new requirements for its population new invigorated living standards, as it requires significantly longer period for supply to catch up growing ever expanding demand (Sekine 2009).
Additionally Chinas near double digit growth over the past two decade especially during six years between 2003-09 residential property prices in coastal areas and the main metropolitan escalated at annualized rate of 12, that is quite bearable and hovers within tolerable range as compared to post-crisis Japan and US subprime fiasco.
Furthermore the countrys financial sector especially the banks is communicating marked improvement over the past five years. Such that in 2003 Chinese banks total non-performing loans (NPL) reduced steadily from 17.8 to mere 1.8 in (2009), although the trend followed by both crisis-ridden Japan in 1990s and the US in 2008 were in total contrast, when the banking system in both scenarios collapsed due to excessive accumulation of toxic assets followed by massive government driven bailout packages(Ozeki 2010). Another reason might have been the relatively low share of lending to the real estate sans mortgage industry less then 20 of the overall lending pie.
3.3 Chinas previous application and implications
Before digging into real reasons behind the fear against countrys real estate bubble and their possible remedies, Chinas previous performance while coping with near-similar crisis has to be looked up deeply. One of the major weapons that policy makers in Beijing have used while tackling countrys economy ups and downs has been the implementation of Proactive fiscal policy. This measure has been rolled-in when needed to push the economy and held back to abate its momentum. Had this been the cause of Chinas escalating real estate market or just had it been the source of ammunition for such bubbles to occur needs to be prodded deeply. As every bubble in any market, anywhere in the world just does not pop up overnight, it gets seeded, buds, nurture and blooms over long period of time. Countrys economic policies are the breeding grounds that raise such perils over decade if not decades. Countries undoubtedly flex their policies to meet emerging challenges of the present but carefully calibrating their side effects for future (Sekine 2008). Over the time various drastic policies had been implemented in China in the wake of Asian economic crisis, the dot com burst and the most recent being the Global economic crisis. Not only such implementations or change in course of actions were prompted by foreign challenges, China itself being the fastest major-growing economy in the world has its own internal challenges, the latest being the fear of overheating, followed by drastic cool (Tanaka 2008). Thus it has to balance external threats and opportunities with internal confrontation, in order to come up with such an approach that would meet its national economic interests and objectives.
3.2.1 Introduction of Proactive Fiscal Policy
It is demonstrated through the various factors mentioned that China experienced difficulty in 1998. GDP was growing only at 7.8, which was a decline from 1997, unemployment rate was at 3.1 and the disposable income also decreased (Chinability). As a result, the central government changed their tight fiscal policy into a more proactive policy with the hope to boost domestic demand. In order to do so, the government expenditure has to be increase. The start of a proactive fiscal policy started on August 29, 1998 where the adjust budget plan included an increase of 56 billion Yuan in fiscal deficit and the plan also included 100 billion Yuan of long-term bonds. The majority of the funds were targeted for infrastructure development, capital liquidity and export tax rebate programs (Articlesbase).
In 1998, there were also other initial fiscal policy activities that was implemented apart from the 100 billion Yuen of long-term bonds targeted for infrastructure development, another 270 billion Yuen of special treasury bonds were issued to the four large state-owned commercial banks in order to improve the liquidity. Another major policy was the increase of expect tax rebates to support the export of goods, which included textiles, machineries and other commodities (Renjing 73).
The above policies were only the start of the Chinese governments proactive fiscal policy activities. The country needed additional aid to boost domestic demand and combat the negative economic environment around the world. Hence, starting from 1999, the government expanded to include more fiscal policies. These activities include tools involved public investments, income distribution, tax reforms and transfer of payments from the central government (74).
As mentioned above, China started to invest heavily in infrastructure development starting in 1998 through the issuance of special treasury bonds. This continued for a several more year and up till 2004, the government issued 910 billion of long-term treasury bonds. The majority of the funds were allocated to a diverse list of areas. The two majority areas included 259.6 billion Yuan for agriculture, forestry, water, conservancy and eco-development, while 131.7 billion Yuan was devoted to transportation and communication activities. The government actively evaluates the areas to better allocate the bonds year to year mainly because of the changing needs and technology. For example, it added new areas such as technological upgrading, high-tech industry and education. From 2002 onwards, the government also started to focus more on developing the rural areas in the western and central regions in hope to balance the social and economic standards with the urban areas (74-75).
In order to boost foreign investments that will in turn help stimulate the Chinese economy, the government reduced import tax from 17 in 1997 to 10.4 in 2004. Furthermore, the duty taxes were also lifted for specific equipments that was used for government favored projects and foreign projects. In regards to consumption taxes, the government also lower the tax rates for certain product and also certain transactions related to housing consumption is also reduced in August 1999, such as real estate-related tax and deed tax. In regards to boosting export, a value added tax rebate plan on exporting commodities was increased from 8.3 in 1998 to 15 in 2002 (76).
In addition to the general tax reforms, the government also imposed additional tax benefits for specific industries that support long term growth for China. Areas include boosting high-tech industries, development of central and western regions and upgrading the old industrial bases in the northeastern region. During the technology phase in 2000, tax incentives specifically in valued add taxes, corporate income tax and import tax were also imposed to encourage the development of high tech industries such as software design. The financial industry also benefited as tax rates on financial and insurance companies were decreased to 5 in 2003 from 7 in 2001. To simulate the stock market, the stamp duty tax rate was reduced as well to 4 in June 1998 and to 2 in October 2001(77).
In order to tackle the income distribution, the government also increased the civil servant minimum wages and pension coverage towards retirees. In addition, annual bonus and additional allowance for civil servants living in rural areas also took place. By the end of 2003, the basic salary increased to 877 Yuan compared to only 400 Yuan back in 1998. An official Social Security System was also enforced in 1999, called The Regulations on Unemployment Insurance and the Regulations on Minimum Living Guarantee for Urban Residents. The purpose of this system is to protect employees who were laid off from state own enterprises by providing impacted workforces allowances for basic living standards and insurance repayments. The national fiscal budget increases tremendously form these three factors towards citizens who worked within a State own enterprise, which bought the total to 103.5 billion in 2004 from 12.3 billion in 1998. In addition, by incorporating the social security system expenses on healthcare, social relief, welfare and pension towards retirees within the public sector, the total social security cost increased to 341 billion Yuan in 2004 from 77.5 billion Yuan in 1998. The establishment of the social security system as well as the adjust wages, China hopes to foster better income distribution and boost domestic consumption (77-78).
Prior to 2002, the corporate-income-tax-sharing system requires that enterprise to pay both local and central government taxes. However, after 2002, the government changed the tax system for corporations where the local and central government shares the income taxes of corporations. As a result, corporations are only asking to pay a fixed percentage. Initially the income taxes were shared evenly amongst the central and local governments, however, this changed in 2003 where the central government received a larger share (Loo and Chow). The central government hopes to use the additional revenue from taxes and increase the transfer payments to local government, particularly the rural central and western regions. In 2004, the tax return and subsidies towards local governments for the central government equals to 1,040.8 billion Yuan. The amount is a huge increase from the humble amount of 249.3 billion Yuan in 1998. The expenditure was primarily focused towards supporting higher salaries and also the tax-for-fee reform, where the central government supports certain activities through the abolishment of tax fee towards rural area. The commitment towards higher transfer payments, especially to the rural area, China was able to improve the local government financial position and also played a role in the development of urban and rural areas (ADB).
In addition to tax relief that the government imposed mechanisms to combat authorized collection of fee and charges to build Guanxi was also introduced between the years of 1988 to 2004. During this period, by abolishing certain categories of fees and charges, this reduced the social obligations of 149 billion Yuan. Chinas entry to the WTO also contributed to the governments incentive to create these means. For example, with high tariffs business organizations will have an incentive to smuggle goods into a market. This was changed as China agreed to lower tariffs with the WTO. (Fewsmith).
3.2.3 Results from Proactive Fiscal Policy
The above measures done through the central government, including the boost of public investments, income distribution, tax reforms and transfer of payments were implemented to boost domestic demand. The result of these activities no doubt supported China to weather through the Asian financial crisis and fostered positive impact towards the economy, including an improvement of social demand, rapid growth through investments, deflation was under control, infrastructure development and also quality and efficiency of economic growth raised. The WTO membership supported these efforts.
Social demand was supported through the tax incentives that was pushed forward, including the fixed corporate income tax which resulted to a boost in social demand and also export increased because of the tax rebates the encouraged corporations to export. The living standards of people in urban and rural areas improved thanks to the huge infrastructure development within those areas. In addition, as efforts were done to improve the income distributions, such as the transfer of payments as mentioned previously, the purchasing power of urban and rural cities also improved. In 2004, the per capita income figures for both urban and rural ideas increased to 7.7 and 6.8 from 1997. Retail sales also increased from 3.34 trillion Yuan of sales in 1998 to 5.95 trillion in 2004 (Renjing 82-84).
Export also increased tremendously due to the increase of tax rebates specifically in tax exemptions, reduction and refunds towards production industries. The total export volume increased to US592.3 billion in 2004 from US183.7 billion in 1998. This no doubt attracted many foreign companies to purchase goods from China given the low cost (86-87).
In regards to GDP, China faced a decline in the growth in 1998. However, with the fiscal policies in place, the GDP was able to turn around to have a growth rate of 10.1 in 2004. Investors and consumers had higher confidence level towards the Yuan, which was a solution towards the struggle of deflation, as prices of goods increased. The Consumer Price Index started to have positive growth in 2002 (Chinability).
The special treasury bonds issued towards the construction sector in China had encouraged investments from local governments, bank loans and investments from corporations. In 2003 construction output is accounted to 6.9 of Chinas GDP. By the end of 2004, China had achieved to complete 34,000 kilometers of expressways, which translates to the second largest in the world. The new railways linking more provinces together as well as new airports projects are in place (Cheong). In regards to shipping, the navigation channels of Yangtze River, Pearl River and Beijing-Hangzhou Grand Canal were also rebuilt. Lastly, the government supported the high-tech industry through tax reliefs. The improvement in the infrastructures in China no doubt provided better living standards, which included safe drinking water, famers access to electricity, lowered electricity rates and encouraged consumption (Renjing 90-93).
Furthermore, education and healthcare was also given positively impacted as well. Over 11 million square meters of education related infrastructure was constructed benefiting over 1.8 million students were completed by the end of 2004. In the rural areas, over 50,000 education projects regarding distance learning for primary and secondary schools was also achieved. In regards to Healthcare, the establishment of the National Centers of Disease Control (CDCs) grew stably where the planned 1,296 centers were opened throughout different provinces. Many counties also experienced one of the 3,787 hospitals that were newly built, renovated or extended. These improvements in the healthcare sector positively contributed towards over 110 million rural residents (94-95).
China experience dramatic growth and benefited many rural counties in the central and western regions due to its commitment towards a proactive fiscal policy. Three major factors including demand in investments, domestic consumption and also the export market improved tremendously which positively contributed to the general society.
3.2.4 NaturalPrudent Policy
Despite the repaid growth, in 2003 problems started to appear due to over investments, which caused pressured on inflation. As a result, in 2005, a more natural fiscal policy or prudent fiscal policy was introduced. The main purpose of the shift is to adjust with the economic growth of the world and to balance the social and economic progress of China. In addition, as China enters the World Trade Organization in 2001, the central government also improved some of the tax structures to be more in line with WTO. The prudent fiscal policy was mainly focused on controlling deficits and refining tax structures (Gao).
The central government understood that it was important to low fiscal deficit in order to prevent inflation and have enough macro control to avoid another deflation like the 1990s. However, the central government did not decrease the level of fiscal deficit significantly in fact the goal was to only reduce the central deficit by 19.2 billion in 2005, which brings the total deficit to 300 billion Yuan (Renjing 115). The main reasons for the gradual decrease was mainly due to the large number of bond-finance projects, the commitment to improve rural areas, the momentum of GDP growth , the commitment to economic and social reforms, the support of public services and also managing uncontrollable economic factors domestically and internationally (Gao).
Given the fact that many projects were bond-financed, especially in construction, these projects takes a large number of years to complete. Therefore, if the central government was to suspend these projects, it will face a huge lost in investment. Furthermore, it is to no surprise that the rural regions, in the western and central areas still need additional investments for development. In addition, if fiscal expenditure is decreased tremendously, it might drive down the GDP growth as well since the economic growth is somewhat contributed towards the proactive fiscal policies. On the other hand, the government needs to continue to commit itself towards social and economic reforms to prepare its people to adjust with the change environment. This also included additional spending in public services as the economy starts to be more sophisticated (Gao). Lastly, the government is aware that there are many uncontrollable factors, such as oil prices, where maintain good macro control would be beneficial (Renjing 116).
3.2.5 Prudent Fiscal Policy Activities
In 1992, Chinas fiscal expenditure grew from 374.2 billion Yuan to 3,370.8 billion Yuan in 2005. The huge increase in fiscal spending resulted to an unbalance of investments across the country. It was realized by the central government that it is important to withdraw some funds in overheated sectors and contribute more to underinvested industries such as agriculture, reemployment, social security, environment, eco-conversation, public health, education and technology. This will enable a more efficient usage of the funds. A specific example was the governments move in changing the grain risk fund where it would benefit the farmers more directly. Initially, the grain risk fund was established where the central government would provide subsides towards state enterprises to purchase grain at a protected price from farmers. Thought some farmers benefited, some of the subsidies were taken from the purchasers of the enterprises. In addition, the central government also declared in March 2004 that all agriculture taxes should be taken out and by reduced the percentages yearly, it was completed taken out by 2006. This further reduced the financial burdens of famers in rural regions. The central government also adjusted their bond-financed projects on infrastructure to use the funds to contribute towards public services in order to sustain long term economic growth in China (Renjing 116-121).
As mentioned previously, during the proactive fiscal policy years, the central government provided tax rebate incentives for exporting companies. This no doubt resulted to a boost in export volume while stimulating the development of relevant industries which translate to overall economical growth. However, rebates of export activities have been defaulted for years since the start of the fiscal and tax system reform in 1994. The main reason for the delay in rebates which effected the economical growth of China in foreign trade, was because of the lack of funds to settle the rebates from the central government. Therefore, the central government decided in 2003 to reform the tax rebate structure by re-evaluating the industries and the percentage of rebates and also sharing the financial burdens with local governments. This act sent a signal that the central government is committed to pay off the rebates that were delayed. In 2007, the central government was able to reimbursing the rebates at a timely manner and prevented new debt from rising through utilizing the over budget revenue appropriately (Renjing 121-123).
3.2.6 Chinas proactive Fiscal Policy in 2007-2008
Proactive fiscal policies introduced in the wake of global burgeoning slowdowns had been an attempt by the Chinese government to pre-empt the negative situation of wests economic tumble. Proactive fiscal policies introduced in the wake of global burgeoning slowdowns had been an attempt by the Chinese government to pre-empt quaver of wests economic tumble. Aim for rebalancing the economy and endeavor for harmonizing society (by integrating rural and expanding urban populace) leverage considerably relied on countrys fiscal policy measures. Chinas growth of 9.5 (GDP growth over the past two decades) increased its revenues substantially while resting its fiscal position firmly on strong keel such a scenario intensified calls within the power corridors for intensified effort towards ambitious economic targets and to support it a proactive fiscal policy. And while jolts began to appear in the global economy many in government took this policy as an effective tool towards combating fatigue.
The policies that were put into motion action in the year 2007 continued through 2008 as the approach began to demonstrate results. Proactive fiscal policies was were not only designed to not only combat the current environment, but to also to stimulate growth in the national economy, as it had specifically been specifically crafted to increase investments from the government, introduce tax cuts, and provide subsidies to low-income families overall, this had a positive impact on the national economy (Global Times).
3.2.7 Policy Objectives
Some of the objectives chalked out in the Central Economic Work Conference as a cornerstone of the Proactive approach were the avoidance of big swings in the economy, the enhancement and improvement in economic controls for the continuation and expansion of the economys momentum. The government also intended to nurture a greater balance in sphere of its international payments. The stimulation of domestic consumption while remaining attentive to increases in investments however was the main thrust of later strategy. This strategy involved the propulsion of Chinas going global move by increasing the emphasis on foreign investments. An analysis by the World BankIMF (Oct 2009) showed that macro-adjustments made by the Chinese government were timely, resolute and well crafted, by the implementation of a proactive fiscal policy and moderate easing of monetary approaches.
3.2.8 Proactive Fiscal policy focus, economys segments
A contrivance activated to offset the fall of the financial crunch was implemented in three steps. The first step was expanding the breadth and depth of government spending in key programs like the subsidized housing, railways for connecting far-flung regions (railway link to the roof of world Tibet had been part of this long term scheme), uplifting projects for rural areas, the environment (especially the green energy sector) and post-earthquake reconstruction. These measures were meant to boost consumption demand to spur domestic growth at one place but it had two pronged objectives the second one had been to better prepare China in dominion of competitiveness by giving it an edge over the recession pruned western economies. So that when the global economy revives China would stand ready with competitive edge as it would then enjoy more streamlined road and rail links.
The second step was to implement a set of policy measures that included increased lending measures and optimizing the whole credit structure. Because deteriorating economic conditions worldwide were the greatest threat to SMEs, greater financial support for such enterprises became a prominent part of the larger policy initiative. The third step was to contribute to a global economic downturn and diminish production locally, providing policy makers in Beijing with an opportunity to implement the greater industrial restructuring and rejuvenation program on a larger scale, encompassing all major industrial sectors.
3.2.9 Policy achievements
The momentum that Chinas economy gained in the past two decades continued through 2007s, despite surfacing of global economic fissures. However, China entered 2008 with an overheated economy that was threatened by inflation (Tanaka 2008). It began to feel the heat of a global downturn in the second quarter of 2008 with a deceleration. This is where the proactiveness initiated in 2007 began to show results, by slowing down the downward trend, as the GDP fell from 11.9 in 2007 to 9.9 growth in first three quarters of 2008 (2008 average 9.5). Regardless of the slowing in trends, China surfaced as the best performing economy in the world (World GDP growth average 2.5) (Articlebase)
3.2.10 Move towards the stimulus package
The heat of the global recession started to affect China in October of 2008, when exports diminished by 2.2. This resulted in industrial growth plummeting to 5.4 in November of 2008 (in October of 2008 it was 8.2). The Shanghai stock exchange dropped by 60 (in 2008 as compared to 2007with an ever increasing number of bankruptcies manifested the vulnerability of Chinas economy. The very notion of Chinas de-coupling from a negative global financial impact, due to its impressive internal and external balance (huge Forex reserves) followed by a capital control mechanism, began to erode. This gave worrying signals to the Central government urging them to come up with a strong maneuver to offset the rising financial tsunami and keep the shores of the Chinese economy safe. This manifested in a 4 trillion RMB (590 billion) stimulus package spanning over the next two years (till 2010).
This measure of monetary easing resulted in the escalating the real estate and other asset prices in domestic market. This situation is similar to Japans market conditions in 1980s, when the Japanese authorities in reaction to the export decline triggered by the upward revaluation of her national currency yen after the arrangement by Plaza Accord 1985 embraced low interest rates approach. This move was meant to rescue and eventually trigger an increase in domestic demand, this resulted in the formation of economic bubble in domestic market.
3.3 What is driving the Chinese bubble
Question is why does the real estate bubble just pops up abruptly and as speculated is turning up in some quarters of the Chinese economy. High savings rate of up to 40 according to certain estimates, accompanied by soaring investment rate that spurs it. China has been growing at accelerated pace since 1990s, but as a result of under-developed social security system, the country has not been able to build up its domestic consumption base. From 1996 to 2006, the propensity to consume has tumbled by 10 points. Moreover, savings done by ordinary citizens ends up in state-owned financial institutions who are interceded by state owned enterprises. Thus under the government instituted soft-budget guidelines these state-owned enterprises set aside the concerns of capital costs and rather apt for boosting the investment. And so when the propensity to consume wanes, these enterprises in order to earn impressive returns are lured to opportunities into real estate investment (Hedge 2010).
With massive influx of people from rural to urban centers, China is experiencing huge demand in housing not only by this migration but also due to impulse within the urban residents to switch from the old once provided by state-owned enterprises apartments to newer, self-owned residences (Hugh 2009). Thus in order to meet this challenge of prodigious tectonic shift government formulated policies allowing state-owned banks to lend money to prospective buyers.
Real estate developers have little or no interest at-all in developing small economy apartments rather following the trend they have set their eyes on opulent condominium a specter never seen since Chinas birth. And such an attraction on part of developers stem from the fact that margins earned through luxury apartments are much higher then those earned by economy complexes (Hedge 2009). Such high-risk high-return gamble forms the basis for Chinas economic real estate bubble to manifest.
3.4 Private financing
Would the sole financing of Real estate bubble had been financial intermediation conducted by the state owned enterprises it would have been easy to avert catastrophe by just deflating the simmering gush of resources and money by sound economic policies enacted by the central government. However in this case problem lie with the source of finance too i.e it is been inflated by the injection of private finances, that circulates mainly outside the purview of administrative control, and marginalizes Governments direct interventionary moves (Fried 2010)
Another interesting trend that is rather unexpected is the swelling of real estate prices in resort cities like Hangzhou and not in traditionally hot markets of the likes of Shanghai, Beijing or Shenzen (Bastiaensen 2009). Zhejiang Hongzhu province is actually among those regions outside the folds of conventionally investment savvy economic zones where the dominion of private financing in housing sector has exceptionally developed over the past decade (Bastiaensen 2009). Much the same way as Japanese real estate market developed that is pouring of investments from relatively developed and richer parts of the country to the under-developed sink (Ozeki 2010), therefore investors money from the industrial Wenzhou flocked into regions like Zhejiang.
New strain of Chinas self-nurtured entrepreneurs awash with hot money has lately developed peculiar pull towards speculative business practices. This league of businessmen after having played with electricity and coal, congregated into real estate sector such that they buy the whole under-construction housing complexes in certain localities and sell them later on exorbitant rates (Anderlini 2010), as a result of such practices real estate benchmarks gets created which are then carried forward in other areas and cities.
But the problem is not just confined to hike in real estate value like the Japanese real estate debacle prices have shot but not the median income. The real estate price in the Hangzhou district hovers around 9000 Yuan sq meter for an average luxury residence whereas average income of locals hasnt crossed the threshold of meager 2000 Yuan per month, thus the demand for mansions and lavish villas is enticed by capitalists and foreigners(Ozeki 2010).
3.5 The comparison
Coming to the comparison part where we try to find out similarities between the state of events transpired in Japan and atmosphere brewing in China.
Since the start of 1985 there had been an upward trend in Japanese currency yen that triggered descent in economy. Such a downturn lead the Bank of Japan to impose monetary easing measures with expectation to shore up domestic demand required for boosting economic activity. But this action by the Central bank generated excessive liquidity glut and as tenable in any functioning economy such excessive funds naturally flew into boom-prone sectors especially the commercial real estate, commodity and equity. Despite seeing this trend central bank continued to pump money into economy ending up with excessive liquidity in commercial banks that ended up in real estate sector. Bank lending during this period nearly doubled (1985-1990) with major chunk ending up in property business (making up an exorbitant 40 to 50 of countrys GDP).
China had also been following the same path in fact real estate boom has become a convention more or less in any booming economy of world today, with its double digit growth its real estate sector has been experiencing major surge since 2005 (Bastiaensen 2009). Two years later government launched actions to contain steep increase in property prices that encompassed measures like cap over banks lending spree and enactment of new property tax system (Chao 2010). As the measures began to show results global financial system was hit by the Lehman debacle triggering a surprisingly strong fallout in last quarter of 2008. Policy makers in China reverted to monetary easing posture followed by excessive bank lending broadened at annual rate of 30 since Jan 2009. It is believed that major chunk of this lending has flown into real estate developers and property-related divisions of large state-owned firms (Aanderlini 2010). Real estate prices across the board has seen surge since first quarter of 2009 and the trend does not show any abatement. In response to real estate overheating government stepped back consciously in her pursuit of easing economic contraction by dampening escalation in bank lending since July 2009, banks lending spree has been contained to moderate annualized 15. While wresting provisions for buying second homes, nevertheless the measures seen so far are not considered an earnest attempt in curbing real estate price upward trend from becoming a property bubble (Chao 2010)
3.6 Forex reserves argument
Checking the validity of Chinas large forex reserve argument that standing at around 2 trillion are more then enough to secure the country from any financial catastrophe. The very notion that high forex reserves are an ultimate warranty of economic stability is a rather mis-conception taking no cue from history (Pettis 2010). Large reserves undoubtedly acts as cornerstone in any countrys financial stability but their usage should specifically be orchestrated to tackle peculiar instabilities. They vehemently serve as bulwark in shielding countries from external debt traps and from currency fiascos, but neither of these risks are faced by China today same had been the case with Japan in 1980s and US in 1920 when both boasted of their huge reserves in respective periods (Bramble 2010). Yet both the juggernauts had head-on-collision into their worst nightmares, and the risk was extreme domestic liquidity. High liquidity exasperated asset and capacity bubble, that was followed by excessive borrowing by the government from domestic market typical risks that most developing economies face on their track to accelerated development.
Worlds two largest economies (Japan and US) during their times paraded forward by piling up unprecedented reserves accumulated in a decade, this was the duration during which they both underwent large currency undervaluation, spurred by expeditious urbanization and surge in workers productivity (Barmble). All three symptoms are hammered into Chinas booming trajectory and now if we close the loop with last missing link we find out that liquidity and subsequent credit expansion forged excessive capacity that seeped through the substratum of economy to sow shaky underlying imbalances, and when the dangers posed by imbalances breached economys solidity, even large forex reserves are rendered useless (Bramble)
3.7 Challenges present and future
As mentioned before that one of the main hindrances in Chinas social buoyancy during the 90s and some part of 2000 had been the unavailability of sufficient housing units to cater to its thriving middle-class that is growing exponentially due to the countrys consistent double-digit growth, and over the years this issue has taken predominant posture in Chinas central planning (Kwan 2010). Nevertheless challenge still lurks in providing fairly large number of appropriately priced middle class housing to its people both in rapidly growing urban and sub-urban areas. This objective is in contrast to what the latest research points toward i.e Chinas thrust in real estate development especially in cities is more directed towards the luxury segment while housing for the mass-market housing units accounts for only 10 of total residential construction (Ozeki 2010)
Demand is one of the several reasons for such tilt but there are other compelling grounds that have lead city governments into towing the luxury housing policy. These developments offer city councils the policy makers with higher margins and because these are the city governments that possess land rights thus it leaves them with no incentive as to why they shouldnt court for such developments, as at the end its the valuable revenue that gets generated and gives leverage to local planners for pursuing their own ambitious projects. Another good reason for such developments has been the inflow of foreign remittances by expats that majorly flows into high-priced housing.
Thus the whole phenomenon is not domestically driven rather theres greater push by foreign investments too, that is case drives the prices up and in effect clashes with Beijings national policy of keeping rates at reasonable levels (Takatoshi 2010). Making it pertinent that the government should balance long-term tactical goals of checking the prices from proliferating into riskier bubbles with short-term objectives of regional governments and real estate developers to achieve a constant and stable housing market (Zhou 2004)
Expansion in mass-market housing is crucial for any country especially for China that would be harboring the largest middle-class in world within next couple of years to recognize the growth accelerated by domestic demand (Zhou 2004). In contrast to Japan and the West bulk of the housing purchases carried out by Chinese is done in cash generally the down payment makes up around half of the total cost at time of purchase thats why the percentage of home mortgages issued is fairly small (Kwan 2010)
But this trend has a lot to do with the overall East Asian culture where the saving rates are high and people usually shun bank loans while buying personal assets (Naito 2010) . But with the presence of more luxury homes on market and Chinas newly emerging middle-class ready to start their new lives especially the young and west oriented Chinese, it would be tempting enough to buy personal house on loans, thus giving an impetus to low-saving, high debt culture that has typically been American (Ke 2010). But if massive shift to loans could be averted more emphasis on homes and durable goods would be a healthy shift towards Chinas self-generated domestic demand as diminution in public saving rate would promote positive personal consumption patterns, that the government it self is trying to stimulate.
3.8 Conclusion
Given Chinas resilience to outside economic turbulences and her impressive continuance in current and potential GDP-growth, its real estate market has great deal of leverage to expand over long term, that is in vivid contradiction to Japanese bubble. Having said with China opening and so its market, it is sliding gradually but surely to speculative realm, that tends to implant the element of uncertainty and riskiness in its expanding real estate emporium preclude to bubble formations.
Thus the real test for Chinese planners would be to how best to avert the brewing friction from shaping into bubble if any by cooling off potentially heated portions of economy, while it shifts the nucleus of housing supply towards mass market. Since July 2006 Central Bank of China given in small space for its currency to sway especially the measure of revaluing Yuan, helped the government to rein in expansion of hot money, backed by reforms in exchange system. This measure backed Central Bank and BOB, stronger directives on discount windows for all the government-owned banks, commercial banks to check the growth of real estate bubble to brew beyond a certain threshold. These and other such measures had been successful in cooling the real estate market in major cities to certain degree but could these be helpful in offsetting the infection in rest of the economys arteries is yet to be seen.