March 25, 2012

A Lingering Hubristic Belief

I suggested a topic on China’s housing bubble. “We’ve seen some big changes come out of the housing bubble. Much of the turmoil in the EU can be attributed to the housing mania. But will it lead to the downfall of the regime in China? Consider this: ‘The breakneck speed of China’s economic development has not only created structural imbalances but also social dislocation. Nearly 300 million rural people (and rising) constitute its floating migrant population working on urban industrial and construction sites. They are not entitled to urban residency because of their rural residency registration. According to the last official estimate, China experienced, in one year, 90,000 cases of social unrest, big and small. The government has stopped compiling and issuing statistics on this. Corruption is now endemic and getting institutionalised, affecting even the higher levels of the bureaucracy and government.’”

“The Bloomberg columnist William Pesek, quoting a report to this effect said: ‘The wealthiest 70 members of China’s legislature added almost $90 billion to their bank accounts last year.’”

A reply, “Rich people in China are targets of extreme envy. Local government officials are not above bringing bogus charges against landowners, and imprisoning entire extended families, in order to simply take over their holdings. It’s one motivation for the rich folks to get out of Dodge, and pay any amount, just to live in a place where the rule of law is observed.”

“In some ways, it’s better being rich in a poorer country–you can buy a better class of servants, for one thing. But ‘we’ (which to a wealthy Chinese person is: the US, Canada, Western Europe, Australia, or New Zealand) have a long-established tradition of property rights and contract law. The idea is to protect the individual property owner from arbitrary and capricious taking of the property by anyone who happens to be richer or more powerful. Such a basic protection simply does not exist in China. Everything you own is up for grabs at all times. Of course, rich people are not stupid; they have their sponsors, their protectors. But they may know all too well how easy it is for the game to change, for a successful predator to become a victim.”

“It’s a very stressful existence. After a while, you can’t sleep at night. You lose what peace of mind your wealth has bought you. At that point, nice quiet neighborhoods in, say, Vancouver, look pretty good. Better than a Chinese prison cell by a long shot.”

To which was said, “Do they still think that’s here? I’ll admit we’ve got it better than them, but I’m not feeling 100% confident that things will stay that way.”

The Taipei Times. “Hong Kong may face renewed risks of a housing-price bubble as interest rates remain low, Hong Kong Monetary Authority chief executive Norman Chan said. ‘On my radar screen, another risk emerged. That’s the risk we encountered back in 2009: the renewed risk of a housing price bubble,’ Chan said. The territory’s low mortgage rates mean ‘real interest rates are hugely negative. Lots of people have come to the conclusion that they buy brick and mortar, tangible assets, and could preserve their purchasing power,’ he said.’

“Interest rates being ‘too low for too long is always associated with a bubble phenomenon,’ Federal Reserve Bank of St Louis President James Bullard said at the same conference in the territory. ‘It’s not just a US policy, but a G7 policy.’ Borrowing costs in Hong Kong usually follow those set by the Fed because the territory’s currency is pegged to the US dollar.”

The Brisbane Times. “China would be demanding less Australian coal because it was already in a ‘hard landing’, JPMorgan Chase chief Asian strategist Adrian Mowat said. ‘If you look at the Chinese data, you should stop debating about a hard landing,’ he told a Singapore conference. ‘Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate any more, it’s a fact.’”

“Chinese Premier Wen Jiabao said this week that home prices were still far from reasonable levels. His comments fuelled concerns the government would maintain restrictions on the property market even if they threatened to slow economic growth. ‘One should be concerned about what’s happening in the China property market,’ Mr Mowat said. ‘People are too complacent.’”

“Yale University professor Stephen Roach, a former non-executive chairman for Morgan Stanley in Asia, said concerns about a hard landing were ‘vastly overblown. I don’t think the banking system will collapse and the property bubble will burst,’ he told a conference in Shanghai. ‘These are all exaggerations.’”

McClatchy Newspapers. “When Chinese Premier Wen Jiabao warned at the recent National People’s Congress of ‘chaos in the market’ from China’s sky-high home prices, he put to rest speculation that the government might soon end the tight controls it’s imposed on the country’s real estate market. The cost of homes in major cities has risen tenfold in the past decade and doubled in the past three years as the country’s breakneck growth has generated huge incomes for a fortunate few.”

“Prices climbed so fast that many of the newly rich didn’t even bother to rent out the investment properties they’d bought. They simply held on to them, secure in the knowledge that the properties will be worth more next year.”

The New Republic. “The fall-out from Chinese Premier Wen Jiabao’s urgent calls this month for political reform—which was quickly followed by the ousting of a top regional official, Bo Xilai, from the party leadership—have fanned whispers of a secret succession war within the party’s top ranks. ‘Power is increasingly decentralized to different factions,’ says Victor Shih, a political scientist at Northwestern University. Whereas the top party figure once had supreme authority, attention now ‘must first and foremost’ be paid ‘to the interests of the factional groups,’ Shih told me, for it is the core elite from these groups ‘that ultimately decides policies, promotions, and even the political survival of the President of China.’”

“But whatever their disparate objectives, each faction has gained from China’s furious economic growth, with wealth and political power increasing as a result of money flowing freely through their respective spheres of control. How convenient, then, that they also hold the purse-strings of finance through China’s state-controlled banks—banks whose reserves can be quickly mobilized for extending loans to projects championed by influencers in the party. It stands to reason why these vested interests haven’t been eager for the easy money to stop, and in fact have been cheerfully flexing their political muscles to direct investments into their own jurisdictions.”

“‘As long as you have politically powerful enterprises, as long as you have a banking sector which is dominated by the state and the Chinese Communist Party, there will be very high incentives to over-invest,’ Shih says.”

“Redundant infrastructure, empty luxury apartments, and half-completed commercial projects sit everywhere in China, with more popping up for the benefit of the developers and politicians involved. ‘Pegging its currency to the dollar and keeping interest rates low created perfect conditions for a bubble around 2005 to 2007,’ Edward Chancellor, an authority on financial bubbles and author of Devil Take the Hindmost, told me. ‘Then, massive stimulus in response to the global financial crisis in 2009—the extension of easy credit—really made it possible for the bubble in real estate and infrastructure, especially, to grow.’”

“‘The trouble with bubbles is once they are inflated, you must carry on with inflating them,’ Chancellor says, because ‘if investment stops growing, you get a contraction of credit and falling asset prices.’ To keep things going, it seems that banks are now making loans to each other and effectively expanding the money supply; but this, in turn, drives up the threat of inflation. ‘I suspect that the endgame is the breakdown of the Chinese credit system,’ Chancellor adds.”

“There remains among some—commentators, officials, casual spectators of this unfolding drama—a lingering hubristic belief that imbalances in China’s state-directed economy can always be controlled and corrected through political means. Yet it is clear that the present model of Chinese state-direction is not only what inflated this investment bubble to begin with—it’s also now making it impossible to take the right course of action to fix it. ‘There is no bubble in history in which the government has not been intimately involved,’ Chancellor says. ‘Those who say that China’s state-directed economy is a different case have forgotten that.’”

Bits Bucket for March 25, 2012

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