China’s real estate stimulus is misdirected. It should be trying to help farmers and small businesses, not property owners.
The Chinese real estate market is down, but not catastrophically. The floor area of residential properties sold in January-November 2008 was 19 percent below 2007 levels, while real estate investment grew 20 percent, though it is slowing. By comparison, U.S. new home sales declined 37 percent in the first 10 months of 2008.
A cooling real estate market is not China’s most serious problem. Indeed, cooling was inevitable after the combination of rapid economic growth and cheap money - Chinese interest rates had been lower than the inflation rate for several years - produced a real estate boom.
But the government is sensitive to the pain of its urban yuppies. So it is coming to the rescue with lower taxes, easier lending terms on second homes and construction loans. A better approach would involve lower interest rates overall and a program to keep lending available. But the government should allow the free market to push prices down wherever there has been overbuilding.
The real challenge for China is not in real estate, but the industrial economy, the country’s engine of growth and largest absorber of new employees. Exports in November were 2.2 percent lower than in the previous year, the first monthly drop since 1999. Imports fell 18 percent and foreign investment fell 36 percent from November 2007.
If the cities are in trouble, the government should try to make the countryside more appealing. It should eliminate some of the multiple taxes on land and agricultural output, while ensuring that a private system of rural land ownership is fully operational throughout the country. Industrial efficiency should be another policy target. That means improving tax treatment of smaller enterprises, and simplifying business bureaucracy.
Governments everywhere respond to political pressure and placate special interests. But such policies, in China as elsewhere, are often not designed for improving economic performance. - Martin Hutchinson
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China’s Stimulus Needs Refocusing
breakingviews.com
18 December 2008
China’s real estate stimulus is misdirected. It should be trying to help farmers and small businesses, not property owners.
The Chinese real estate market is down, but not catastrophically. The floor area of residential properties sold in January-November 2008 was 19 percent below 2007 levels, while real estate investment grew 20 percent, though it is slowing. By comparison, U.S. new home sales declined 37 percent in the first 10 months of 2008.
A cooling real estate market is not China’s most serious problem. Indeed, cooling was inevitable after the combination of rapid economic growth and cheap money - Chinese interest rates had been lower than the inflation rate for several years - produced a real estate boom.
But the government is sensitive to the pain of its urban yuppies. So it is coming to the rescue with lower taxes, easier lending terms on second homes and construction loans. A better approach would involve lower interest rates overall and a program to keep lending available. But the government should allow the free market to push prices down wherever there has been overbuilding.
The real challenge for China is not in real estate, but the industrial economy, the country’s engine of growth and largest absorber of new employees. Exports in November were 2.2 percent lower than in the previous year, the first monthly drop since 1999. Imports fell 18 percent and foreign investment fell 36 percent from November 2007.
If the cities are in trouble, the government should try to make the countryside more appealing. It should eliminate some of the multiple taxes on land and agricultural output, while ensuring that a private system of rural land ownership is fully operational throughout the country. Industrial efficiency should be another policy target. That means improving tax treatment of smaller enterprises, and simplifying business bureaucracy.
Governments everywhere respond to political pressure and placate special interests. But such policies, in China as elsewhere, are often not designed for improving economic performance. - Martin Hutchinson
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