Here is why China doesn’t want to crush its property bubble: Kohler

Six months or so later than Australia, China is back in economy-cooling mode, but in contrast to our brutal succession of rate hikes, the measures in China are tentative tweaks.

Real estate was the largest contributor to yesterday’s 11.9% GDP growth for the March quarter, and is the focus of official cooling measures. Property development grew 35% and urban house prices rose 11.7%, year on year (less than Australia’s 12.7%, as it happens).

So China’s State Council decreed this week that anyone buying a second home would need to put up a 50% deposit, up from 40% previously, and pay a higher mortgage rate. The deposit for first homes larger than 90 square metres was set at 30%.

There are a couple of reasons why the Communist Party doesn’t want to crush China’s property bubble and certainly doesn’t want to do anything to hurt small landholders.

First the official party newspaper, People’s Daily, reported yesterday that land transfer revenue jumped 43.2% in 2009 to 1.4 trillion yuan ($224 billion). This is the main source of revenue for local government in China, and most of the money is spent on land acquisition, compensation for demolition and employing building workers.

The revenue from property is enormously important to China’s system of government, just as stamp duties (and gambling taxes) support state governments in Australia.

The second reason the Chinese authorities are not really getting stuck into the property bubble was suggested to me by a fascinating note from GaveKal’s Louis-Vincent Gave this week, in which he explained why land is fundamental to China’s economic success (and that of Japan, Taiwan and Korea).

Gave quoted a 2008 study by the World Bank, which showed that since 1950, 13 economies had managed to grow at more than 7% per annum for at least 25 years.

Three were city states (Hong Kong, Singapore, Malta) that offered no lessons for others. One (Oman) is oil-rich, while another (Botswana) is a diamond mine. That leaves eight.

Four of them stalled (Indonesia, Thailand, Malaysia and, earlier, Brazil) while only three achieved ‘first-world’ status – Japan, Korea and Taiwan. China is an economic superpower, as Robert Gottliebsen said this week, but not yet a first-world nation.

The key difference between the ‘stallers’ and the success stories is land policy. “In Japan, Korea and Taiwan almost all agricultural land was subdivided under American supervision into household plots in the wake of WWII,” Gave said.

“In South and South-east Asia, by contrast… largely ineffectual land reform attempts have kept tens of millions of landless and capital-less in dire poverty.”

In China the murderous campaign against landlords after 1949 led to the disaster of collectivisation, but in the late seventies under Deng Xiaoping, there was a transition to household farming. Now, according to Gave, farmers are getting title to their lands and increasingly able to use that to get financial capital.

As explained above, property taxes are also financing the system of local government in China, through which funds for urban development are funnelled.

The Chinese Communist Party is also doing a “decent job”, says Gave, of keeping the kleptocrats at bay by ensuring that monopolies and cartels remain controlled by the state. In the four stalled economies, monopolies became controlled by cronies of the ruling elites, who used them to rob the people blind.

The benefits of state control can also be seen the government’s ability simply to issue decrees about things that in Australia are determined by the market and hard to control (like down payments on second homes).

There is a downside to all this though – the Communist Party does not accept any competing poles of power, which means that successful private entrepreneurs and business leaders are rare and the country lacks corporate structures through which managers can develop and shareholders can receive dividends.

It is only possible to build private capital through real estate development or speculation at the casino known as the Chinese stockmarket.

Secondly it makes relations with China quite difficult since no one has the faintest clue how the place works, even Mandarin speakers like Kevin Rudd.

That lack of understanding extends to the property bubble. Jim Chanos, the American hedge manager who has famously predicted a huge real estate collapse in China before the end of 2010, could find himself walking to Mt Kosciusko.

This article first appeared on Business Spectator.


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