Saturday, April 27, 2013

Will Boosting Domestic Demand Help China?

Click here to watch the NTDTV Video Interview.

In China today, the economic Troika has stopped working. In addition, the macro-control has often been interrupted. On April 25th, the Standing Committee held a meeting to study the current economic situation and related tasks.

Observers point out, China's current economic predicament has tightened the space for macro-control policies. Will their focus on “bringing out the potential of domestic demand” become the cure for the economic plight?

It was pointed out during the Standing Committee meeting, that China's economy still faces difficulties and challenges. Continuing implementation of fiscal policy and prudent monetary policy is necessary.

Mao Yushi, Mainland economist: "China's problems come from the microeconomics, which cannot be resolved by macroeconomic adjustments. From microeconomic perspective, there are many issues, such as the land cannot be freely traded; RMB is not internationalized; and many industries and private capital cannot enter.Food supply and the limited 295 million acres of arable land are all problems too. "

On April 25th, British Reuters published an article on China's economic realities predicament and macro-control policy. It says, the dilemma China faces today is similar to that of the global financial crisis five years ago. With the exception that there were 4 trillion Yuan economic stimulus plan at that time.

At present, option policies are very limited. Observers think, the economic Troika is no longer effective, after 30 years. Thus, it was suggested in the meeting to focus on “bringing out the potential of domestic demand.”

Mao Yushi: "Increasing GDP’s consumer spending share has many issues, like tax’ and large state enterprises’ reform. If they remain the same, there will only be limited improvement in consumption.Currently, only changing of policy can result in increasing potentials. To increase consumption, you must first increase income; without an income, how can you boost consumption?” 

The meeting also stressed on the good grasp of real estate market regulation and housing market security.

Jian Tianlun, Chinese economist in the US, believes, China’s macroeconomic policy is entirely wrong.
Due to the nationalization of land and the real estate market irregularities, housing prices continue to rise.

Jian Tianlun:“The main revenue of local governments comes from land-selling. If private ownership of land was in place, this would not happen.

Once having house and land, one does not need to hand his money over to the government.”

Jian Tianlun further points out that for these very reasons, officials have colluded with real estate developers. Officials supply them with cheap land, and in return are ‘rewarded’ with free housing units.  Thus, it is not uncommon for a person in China to own more than 100 housing units. Therefore, one can see “ghost towns” or “empty cities” popping up here and there. When these officials can obtain free housing units, they don’t mind paying the 20% tax surcharge.

Jian Tianlun: "That's why recently housing prices went up, even with 20% surcharge of tax from selling a housing unit. Simply put, the demand exceeds the supply, and the owners can add the surcharge to the selling price. The uneven distribution of wealth, and the housing price’ increase are forming a vicious cycle; the bigger the increase of house prices, the bigger the gap between rich and poor.”

The well-known U.S. investment firm GMO published a research report on China’s stimulus measures. It says that in response to the global financial crisis, and export orders collapse, China ordered the banks to lend. Last year, new bank loans were equivalent to 29% of GDP. Most of these loans flowed to the infrastructure, real estate, as well as state-owned enterprises. This stimulus would lead to terrible aftermaths, the research predicts.

The report also said that this real estate boom offers great opportunities for corruption. Land is often forcefully gained; developers underpay owners of properties; officials are addicted to kickbacks. As to infrastructure spending, local officials have many opportunities to fill their pockets too, by turning a blind eye to the poor quality of building materials. The report also noted that the systemic corruption has lowered the quality of China's economic growth. That results in a fragile financial system, environmental degradation, inadequate law enforcement, unsafe infrastructure, unresponsive public health services, and crumbling regulatory systems.