Early in the morning on Nov. 25, Ren Zhiqiang -- one of China’s wealthiest, most famous and arguably most detested real estate developers -- posted a question to his 5 million followers on Sina Weibo, China’s most popular microblog. He asked: “Is there any country in history that has managed to grow its economy stably after a property bust?”
This was no philosophical inquiry. Over the course of the last two months, government officials have tried to turn China’s heated property market into something more equitable for middle-class home buyers. As a result, they have forced home prices down in at least 33 cities.
That would be bad enough for Ren Zhiqiang -- and the many Chinese homeowners who now find themselves with negative equity. But for Ren, what makes it considerably worse is that this crash is, in large part, a bureaucrat’s bet that the long-term health of the Chinese economy is best served by purposely tanking the real estate market now, rather than waiting for it to tank on its own. He took obvious exception to this on Weibo:
I wake up this morning and find the radio, TV and print media all going on and on about how the property market is entering a winter season as real estate prices tumble. I don't understand -- are these macroeconomic adjustments here to help stabilize economic development, or are they here just to make property prices fall?
One could be excused for thinking the macroeconomic adjustments were to lower property prices, but the intention is unquestionably to help stabilize economic development and slow inflation. It’s a bold gamble by China's leaders -- and it suggests an almost unfathomable confidence that the Chinese economy can sustain a significant blow to its property sector, which accounts for 12 percent of GDP.
This is quite the shift: Only months ago, newspaper writers, bloggers and microbloggers were questioning if China had a property bubble. Today, everyone's talking of breathtaking declines in property values as if they’re talking about the declining fortunes of the Chinese national soccer team.
Take, for example, the long Nov. 29 article, “Will Housing Prices Fall 40%? Predictions by Real Estate Industry Leaders and Public Officials,” in China Economic Weekly, one of the country’s oldest news weeklies (published by People’s Daily, the self-proclaimed Chinese Communist Party mouthpiece). The story featured industry and government experts' predictions on just how far China’s residential real-estate market could fall.
In the article, a “senior official” with the Real Estate Association of China first predicted a modest 10 percent tumble for China's major cities -- Beijing, Shanghai, Guangzhou and Shenzhen -- by the end of 2011. Other experts later offered predictions that housing prices would drop about 25 percent. But then Cao Jinhai, an economist with the Chinese Academy of Social Sciences, arrived to represent the “more than 40 percent” camp. He said:
Forty percent is just the average drop in the national housing price. If referring to first-tier cities, I think the average drop will be over 50 percent. Some specific buildings and regions may even fall more. The reason why it will fall so much is that the speculation and investment demand has jacked up the price so much. Therefore, the housing prices must drop by a huge margin due to the fact that the country is hitting investment and speculative demand.
Anywhere else in the world, a government-mediated 40 percent decline in property values would, presumably, not be spoken of with such a dispassionate tone. But on editorial pages across China, the tone is not only dispassionate, it is almost universally affirmative.
On Nov. 29, Beijing Youth Daily, the official newspaper of the powerful Communist Youth League, published “A Minimum Price Drop of 50% Is Acceptable.” It read:
How much is a reasonable drop in houses prices? We ought to take the acceptance of the common people as the standard, and whether or not they can accept the price directly related to their income. So, housing price-to-income ratio, which is a common index around the world, becomes an important standard for measuring the housing slump. According to the 1:6 housing price-to-income ratio, at least a 50 percent fall in the Chinese housing prices appears to be reasonable.
New Century Weekly, an independent publication that enjoys considerable autonomy to criticize government policy making, celebrated and endorsed the policies responsible for much of the current decline in property prices in an unsigned editorial on Nov. 18. But unlike publications more closely tied to the government, it managed to avoid recommending acceptable decline rates:
A debate is raging over whether the Chinese government should ease market controls designed to reduce housing prices. So far, thankfully, the "nays" are winning ... As developers run out of cash, demand has been shrinking for vacant land and construction materials. Investors are shying away from property, too, and real estate agencies are folding for lack of business. Local government revenues, which depend heavily on land sales, have also shrunk ... What happens next will determine whether, ultimately, the housing market initiative succeeds.
We certainly want it to succeed. So the government must resist pressure from ... special interest groups, including those calling for policy easing to "save the market."
What’s so striking about editorials like these is the extreme confidence in the Chinese economy that underlies them, but there are plenty of reasons to believe that such confidence is warranted.
Terry Ng is a director of Ding Fung Limited, a rapidly expanding, family-owned scrap metal import and processing company in Foshan, a booming southern city of 3.5 million. On Nov. 21, Ng drove me to his newest facility through a tangle of construction cranes, delivery trucks and new high-rises in the city’s Nanhai district. The pace of construction there had recently accelerated, despite tight credit controls and other efforts to strangle China’s real estate market. He told me, with a rueful smile, that the price of residential property per square meter in this part of town had declined to $1,560 from $2,340 in just a few months.
Ng’s business is tightly connected to the global and local markets for aluminum and copper, metals that play a key role in building modern apartments. But when I asked if he was concerned, he shrugged. “It’s okay," he said. "It just means that people who couldn’t afford a house can buy one now.”
To many like Ng, mass urbanization combined with cultural drivers -- such as a long-standing belief that homeownership should be a prerequisite to any marriage -- will support the market once the speculators are gone.
Not everyone in China is so sanguine. Many believe that the government’s policies will cause real damage to China’s economy and society in the short- and long-term.
Qiu Zhenhai, a commentator on Hong Kong-based Phoenix TV, a station with close ties to Beijing, tweeted on Sina Weibo:
The housing price problem has torn Chinese society into two pieces. One half is the homeowner group and the other is the non-owning group. The former not only wishes that the housing price will not drop, but also wishes it to rise steadily. The latter not only wishes the housing price will drop, but wishes that it drop sharply ... The latter aren’t very influential, but they do have the energy to riot.
To the government's dismay, new home owners, confronted with a sharp decline in the value of their properties, have taken to protesting against property developers who have adjusted prices downward. These protests show no signs of letting up. They may also have been one reason why, on Nov. 30, China’s central bank surprised many with a technical measure that should spur bank lending.
Observers like Xu Xianan, a professor at the China Europe International Business School in Shanghai, are deeply concerned that Beijing's continued market interventions will only exacerbate social tensions. Xu tweeted on Sina Weibo:
When the housing price dropped, those who didn’t own homes applauded while homeowners pounded the sales office with anger. So how can the house price represent the people's interest? ... A market economy is inherently a game for multiple interests, not some abstract, monolithic interest of the people.
As Chinese bureaucrats attempt to regulate a more equitable distribution of housing in China, this might be the important lesson yet to be learned.
(Adam Minter is the Shanghai correspondent for the World View blog. The opinions expressed are his own.)
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