The direction of China’s residential real estate market has changed. After two years of stimulation to boost sales, the government is now trying to tread out the bubbles. A spree of policies were released to develop a rental market. From local to central, the government has pledged to equalize the rights of renters with homeowners.
While policy sentiments point in one direction, opinions are divided. Some are dismissive, arguing the government will return to stimulation again when growth slides further. Some are concerned, worrying that a relaxation of current restrictions will lead to violent price rebounds. Still some are confident, trusting the government to stabilize and fix the market.
The first group is correct in pointing out that it is critical for the government not to stimulate the market again. It is therefore helpful to look at the government’s record for handling difficult issues. If anything, the Xi administration has consistently confronted long-term issues, although not necessarily fixing them once and for all. From local government debts, to the integration of Beijing, Tianjin and Hebei, and to financial speculations, the Xi administration has shown strong willingness to deal with fundamental challenges.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Legalizing accumulated local debts while allowing local authorities to raise funds for legitimate spending is the first of such cases. After ten years of empty talk, the Budget Law was amended under the Xi-Li administration. Taking effect in 2015, the revised law lifted a 20-year ban on local government borrowing. The administration set local credit debts to swap into bonds in three years. Additionally, local governments were authorized to continue borrowing from the bond market, provided their deficits are approved. Ever since, the administration has opened new channels for local financing while curbing illegal activities. Although the root cause — a mismatch between local revenues and spending — needs time to fix, increasing supervision over local borrowing is a step in the right direction.
Blessed by President Xi, developing an urban cluster around Beijing in the name of regional coordination is the second case. Seeking balanced development of Beijing with neighboring Tianjin and Hebei, the plan has failed repeatedly until now. Challenging local protectionism, where local authorities prioritize local development at the cost of efficiency, Xi has sought to set up a model for regional coordination. A designated leading group taking Xi’s orders directly was set up within the Party’s highest decision-making body. A poverty relief fund was put in place, with contributions from Beijing and Tianjin, devoted to Hebei. A trusted aide of Xi was appointed Beijing mayor then party secretary, further safeguarding this initiative. The establishment of Xiongan New Area will test new models for green and innovative development.
The government has lately focused its attention on the financial market where speculation is a norm. Disappointed by low returns in the real economy, financial institutions innovate to bypass regulations and invest in financial sectors with higher returns. As reserves are required for deposits, banks push funds off balance sheet by issuing wealth management products (WMPs), which then find their way into the forbidden real estate market. Short-terms funds are rolled over to invest in long-term assets, increasing the vulnerability of the financial market. “Channels” are created by investors to direct funds across assets classes.
As a result, the GDP share of financial services has increased rapidly in China, accounting for a third of service sector growth in the first half of 2015. By taking down the former insurance regulator, who is blamed for encouraging risk-taking by insurers, the government has send a powerful signal to financial institutions. Following the lead, from financial regulators to institutions, efforts are made to shrink bank’s balance sheets while reducing other shadow businesses.
However, the willingness of the government to face difficulties by no means guarantees success. As a matter of fact, Beijing’s obsession with controlling the markets, even at the cost of challenging economic laws, is disturbing. In the name of resource shortage, population caps have been firmly imposed on tier-one cities, ignoring the benefits of economies of scale. The stock market slump, despite the government’s saving efforts in 2015, left the government with losses in hundreds of millions.
It seems likely that the economy will sink deeper and before any of the government housing initiatives take effect. If, and for how long, the government will tolerate slower growth — as low as 4.9 percent for 2018-19, according to EIU–remains to be seen.
Xinling Wang works for China Policy, a Beijing-based policy advisory group.