So, after some concerns and worries, the Chinese government has responded with new measures to try to solve the growing problem of tight financing for small and medium sized businesses. I would describe these measures rather as the” how to stop crazy bosses from running away because they have borrowed from loan sharks” policies.
Following a meeting in the State Council, Premier Wen Jiabao announced six new measures to support small business:
The more important 4 points of the 6 are:
The State Council will also raise the the entry point for some taxes for small businesses and reduce some stamp duties, etc.
On the whole, policymakers seem to be aware of the problem (of course they are). But these measures aren’t really that dramatic against the backdrop of a tightening cycle. Also, the it does not sound like a very good idea to reduce the risk-weighting of SME loans, which are more risky. I am already very pessimistic about Chinese banks, and I am sure that there is room to be even more bearish on banks if policy makers think that it is a good idea to start lending indiscriminately again.
On the whole, I am not convinced that these will help a great deal.
On another front, Chinese central government appears to be going the other way in keeping the pressure on credit. Earlier this year, it asked local governments to come up with measures to curb property prices. Local governments responded with half-hearted measures and only one of them had a target for falling prices. Then, earlier this year, we had Haikou of Hainan reportedly cancel the property restriction.
Now, Foshan of Guangdong announced yesterday that it would also cancel the purchase restrictions. However, they withdrew that decision to withdraw the restriction on the same night (via WSJ Chinese).
FT Beyond Brics points out that the prices fall in Foshan was not particularly big, but transaction volumes have collapsed. The reason for the withdrawal of the curb is probably due to the reality that local governments themselves rely on real estate related income to fund themselves.
But why the withdrawal of the withdrawal? As mentioned a while ago, while local governments are worried about the health of real estate developers as local governments depend on them, the view from the top is very different. As FT points out, senior government officials would like to see some developers fail, and that would force them into cutting prices in order to generate cash flow to survive.
This is a manifestation of the conflict of interest between the central government which wants to see home prices come down and local governments and real estate developers which don’t. The local government and real estate developers seem to have run out of luck this time around.
I just wonder how long this “great adjustment” to a more consumption heavy econonmy will take (in the last two 5 year plans I believe?). Without consumers to pick up any slack in fixed investments, how can there be anything but a slowdown? And if there is, how much more fixed asset investment can go on to kick the can down the road?
Michael Pettis is the man to go to for this issue. He points out that consumption as a percentage of GDP has declined over the last 5 years, and for rebalancing to occur it must grow faster than GDP for an extended period.
Which in the near future means China needs very stong consumption growth in an environment where GDP growth is challenged. Which really isn’t very likely. What would prompt such a turn-around?
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Personally I think the idea that China is going to turn itself into a consumer society any time this decade has absolutely no basis in reality. You can’t simply create a consumer society by decree. The preconditions are generous blue-collar wages, adequate leisure time for the working class,affordable housing, near full employment and relatively low private debt levels (to start with).
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Basically you need to look something like the USA in the 1950s or Germany in the 1960s.
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The problem China has is that as their wages rise the low-tech jobs will move to India and Vietnam. And as tehy try and move up the value chain during a global depression they will face desperate competion from Japan, Germany,Korea and the USA as widespread unemployment and stagnant demand creates a more protectionist political environment.
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Their success to date has rested largely on stealing market share from complacent competitors, but that complacency has gone now that times are tough, and they are going to have to fight hard for additional market share.
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They’ve leveraged their export success with a fixed investment boom, but it looks like that is coming to and end too. They are basically going down the same road as Japan, twenty years later – they’ve pushed the export-led model as far as it can go and now they’ve stalled, but they are trying to keep the dream alive building bridges to nowhere.
Since the overriding aim is to raise living standards, the policy is to grow as fast as inflation will allow. I’m assuming the next set of official inflation numbers will be in the low 5′s and the Government is probably also pre-empting a slow down in the external world, so it can take its foot off the brake and start to support businesses in distress.
Some interesting extracts from China Beat:
Domestic spending
“If real estate prices keep rising, then you’re using all of your money, all of your parents’ money to buy an apartment for you and your spouse,” Shih said. “You don’t have any money to buy anything else. How can you expect people to spend more in the future when every major policy in China actually leans against that?”
Government policy
“Economists like Tsinghua University’s Patrick Chovanec are doubtful that local officials are going to comply with the central government policies to slow the pace of development due to the financial incentives they face to continue encouraging high levels of construction.
“They have every incentive to just say, ‘well, our real estate market is very sound,’” Chovanec said. “Because the alternative would be to pull the plug on growth and that would be committing professional suicide.”
Additionally, there is the common off-the-books patronage that real estate companies are required to give their government contacts for permission to build. According to Hanqing’s son, Zhang Yun (name changed), his father’s associates in residential real estate have had frequent experiences with government officials who demand massive discounts on investment-grade apartments before approving deals.
“If he is the [real-estate] authority, he visits the real estate company,” the younger Zhang said. “The real estate company then has to give him a set of apartments that have no profit or even a slight loss.”
Coercion
“Shih said that government’s response had been tepid because he did not think the government was truly worried about the prospect of popular resentment over inflation and corruption in the housing market. He cited the government’s heavy investment in censorship and policing—which for 2011 exceeded official spending on the military—saying that as a result, officials did not believe themselves vulnerable to popular protests, only to the interest groups that Kunming lawyer He Haojun had cited as being influential in society: the wealthy and the developers.
“They believe in their coercive capacity,” Shih said. “The government isn’t elected, so why should they care? [NOTE: Imagine either major Australian party if they had a ticket for life...] They have to care about the interests of a small number of elite, including real estate developers. So as long as the developers don’t face a declining real estate market, they’re able to sell the real estate and the local government is able to sell the land, it’s fine for now.”
So how will the party end and what will the demand curve for Aus resources look like? Anybody’s guess..
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