With China poised to spend its way out of trouble, it may seem a strange time to attack the government for meddling too much in the economy. But it is unlikely that things would be looking so bad had Beijing not taken a pin to the property bubble in 2007.
Slowing exports have certainly lopped a percentage point or two off growth, but the far bigger problem facing China’s economy is a domestic slowdown led by a property market collapse.
The story began in mid-2007, when Beijing officialdom decided that rocketing house prices had to be brought back down to earth. They concluded the problem lay with property developers, who were building too much high-end housing and not enough affordable housing, pushing up prices across the board. Determined to pop the speculative bubble, Beijing ordered banks to cut credit lines to developers, minimum down-payments and transaction fees were raised, and new land laws prevented developers from hoarding land.
But these attempts at micromanagement backfired. Buyers were driven out of the housing market – not just at the high end, as the government intended, but in every segment of the market.
Housing sales volumes collapsed in the first quarter and price growth, having peaked in January, fell in all major cities. Prices continue to drop nationwide and some are expected to see declines of 30-40% by the time the contagion is over.
It is true that house prices needed to come down. By the end of 2007, the average house in Beijing cost a jaw-dropping 15 times more than the average household income in the city. Most other major cities had ratios of 9-13 and the average for all cities in China was 10 – compared to a ratio of between 5 and 8 in most Asian countries.
The impact on the wider economy was devastating. With the collapse in housing sales, construction came to a standstill. And then demand for basic materials – steel, cement, aluminum, copper and so on – disappeared. China’s heavy industries suddenly found they had no orders. By the third quarter, most basic materials industries had cut production by 20-30% and demand for electric power had plummeted.
Amid this devastation, what can be done to get construction and heavy industry back on its feet?
Beijing’s fiscal stimulus package is a good start. Aimed squarely at new infrastructure investment, 45% of the headline package will be plowed into railways, roads, airports and the power grid. Initial estimates suggest that this will boost steel demand by 150 million metric tons over a two-year period – equivalent to nearly one-third of the country’s 2007 steel production.
There are also signs that policies designed to re-stimulate the housing market – cuts in mortgage rates and minimum down payments, particulalry for first-time buyers – are having some effect. Sliding sales volumes in big cities appear to be bottoming out as lower prices and cheaper financing make purchases more attractive. After a disastrous few months, property developers have finally seen their stock prices rally.
With property coming back on track, the heavy industry food chain – steel, cement, building materials, energy – should follow, which is good news for the economy as a whole. The green shoots of a domestic recovery are in place.
But the property collapse remains a cautionary tale for Beijing not to meddle in the market. Despite the best of intentions, it can come back to bite you in the ass.