Shanghai outlaws property discouting

Chinese property developers have been in trouble for the best part of a year.  Recently the penny dropped and many began cutting prices. Then guess what? People who already owned properties got cross and, in Shanghai, went to  smash the showroom and sales office of a developer offering 30% discounts on flats.

But China is, after all, run by a Communist Party with a love of  intervention and distorting the market with weird price controls from time to time. And yesterday Mingpao reported that the Shanghai government has banned China Overseas Land (688.HK)  from cutting its prices by 30%.  The regulator reportedly said that such a discount is “obviously violating the regulation”, and  now any projects which are offering more than 20% discount should be re-filed to  the regulators before sales.

So there you have it, property developers have been squeezed  as volume dry up, and just as they finally face the reality to cut prices, the  government helps to dry up the volume once more by banning price cutting so that  they can’t sell as many as they would have wished.  Socialism at its best.

Bullish arguments or the “muddle-through” camp (which is  basically also in the bullish camp) now argue that because the  social impact of falling prices is undesirable, as well as disastrous for the economy, policymakers will not allow a significant correction to  happen.

The question I ask is: why would you still think that  policymakers can handle it?  Bulls did not really think that policymakers  could cool the property market and, in fact, policymakers have tried and failed to do so for the best part of the past 2 years. Now the bullish camp thinks that policymakers cannot allow  prices to fall no more than 10%, and policymakers have the ability to stop real  estate prices from falling too much.

This wonderful expectation  is totally asymmetric: prices cooling measures never work, and prices supporting  measures will definitely work.

Moreover, the experience Hong Kong has shown that in a uptrend, government measures to  cool prices have very little impact on the trend, until the trend changes.  Similarly, in a bear market, property market support measures did not stop prices from falling.  One can also point to the current  situation in the US housing market, which is only  stabilising now after peaking about 5 years ago despite having massive  fiscal and monetary stimulus.

As I have said many times before, the ideal things that the  Chinese government might be interested to achieve is a mixture of incompatible  goals.  Striking the right balance is infinitely harder than striking the wrong balance.  Curiously though, there are still many people who think  that the base case for China is achieving that perfect mixture of incompatible  goals.

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  1. How is this any different to what our own government has done in relation to propping up house prices?

    Or any different to the RBA’s control of interest rates, the price of money?

      • No, I wouldn’t want to bring the wrath of Victoria police upon myself.

        All hail dear leader Robert Doyle!

      • Did anyone see a documentary on ABC a couple of weeks ago – talking about the birth of the Australian Motor Industry (and in particular the GM investment in Holden).

        At the time, the CEO of GM in the US (in the late 1940’s) referred to Australia as a communist country due to the amount of government intervention in most industries (power, telco, etc.). He also called the political system of Australia communist, and was very suspicious of his meetings with Australian government ministers.

        Given the amount of intervention has not changed (even though infrastructure has been sold off, the government still does have some control), it would be fair to say that Australia is much more centrally regulated then the US.

        This central regulation is most likely going to see a shift from Private Debt to Public Debt (just like the US and Europe) before we feel too much pain.

      • The difference between the West and China is not so much significant as it seems, it is just in the type of capitalism, but it is still capitalism. Under the surface one should see the main features of the system, what kind of monetary system, production and distribution of wealth and income it has. As long as there is a capital formation, accumulation and credit involved with fiat money, we have capitalism, because credit is the ultimate form of capital existence.

        The former totalitarian regimes reached their credit limits and collapsed under the debt burden (as any capitalist enterprise would), because the state capitalist took too much debt, but it couldn’t deliver adequate balance of capital investments and accumulation, mass consumption and excessive demand supported by fiat money created by the same state capitalist and paid as wages without adequate supply of goods. Everyone felt richer, because of the huge savings people had, but there was nothing exchangeable on the market towards those savings (so the real income was actually gradually falling as it is the last 20 years in USA). The accumulation of the capital was in foreign private banks accounts instead of invested in consumption goods production (similar problem in USA, but they compensate its poor production with import goods, while in Eastern Europe the import of Western goods was restricted with political reasons and because the capital was better preserved in private banks account than used for production purposes).

        The problem was the same like in GFC with the following difference: the capitalists who were bankrupted were the states and that is why the whole state owned system collapsed. The capital was restructured (as it is in USA and Europe now) and the people paid the bill to the same banks, which gave the credit to the state capitalists (the communist governments), who used it to accumulate personal wealth in foreign accounts in the West. The idle national assets of overcapitalized industries were sold for discount prices or for nothing to the same members of the former “company” board (the communist party committee members and their families, who were before members of the board of the state corporation). The standard of living of the Eastern European nations (the working people, who were all middle class before) failed dramatically, because they were left with the debt bill to pay, but now many of those states have much healthier finance than any of the Western countries, They have paid their debt to the same banks, which are now in trouble.

        China has learned some lessons from both systems, but its system is still capital formation based, so there won’t be much difference in the upcoming problems and crises of its economy. And by the way, if the trade with China was restricted as it was with the former Eastern camp, China would have never ever had this growth and economic success it has now. China and Asia are a kind of Western capitalism extension, which also has its own limits although we can count on their 4 billions people for further capital growth. At the end our planet poses the absolute limit of our greed and wealth aspirations.

        As we can see, the experiments of the last century – with privately owned corporations or a government owned corporation – can insure economic or environmental stability and sustainability and the reason is simple: because of the disproportional accumulation of capital on one side and less real income on the other. If this is not clear from the last GFC and the history maybe we need something more painful to occur as to grasp the reality. Meanwhile dysfunctional politicians with unrestricted power of global corporations is a very interesting mix for global future, don’t you think so?

    • Negative gearing etc as practiced here transfers money destined as government tax income to the banks. ie. we all pay.

      Fixing prices the Chinese way merely stiffs whoever happens to be holding the land at the time as they can no longer sell.

  2. Maybe not communist per se, but I can see Pariah’s logic that our regime also tried to favor one group of population (the housing-have) over the others (the housing-less).

    This bias in policy is also a strong flavor of communist regime i.e favoring the poor / worker class over the rich / capitalist class or at least that was their utopian goal.

    • Agreed, not communist, but not completely democratic or market either. And I don’t believe we’re at all alone in that. I think it’s a bit rich that GM’s CEO is calling Australia communist, given the pervasive level of government intervention in the United States.

      I don’t believe government should have any role in society beyond providing the most basic public services. To do any different requires you to accept that government bureaucrats are better at allocating resources than markets.

      • It’s the same problem wherever it occurs – rent seeking in “planning gain”.

        In China, it is corrupt Party members exploiting their position. In Western countries, it has a fig leaf of respectability by calling it “urban growth containment”. But the effect is the same.

  3. Ok say developers are prohibited from dropping prices. Then what? Won’t we start seeing a build up of unsold stock on developer hands (because they can’t drop to sell)? Won’t this lead to a drop in building activity as developers need to move stock before they can continue on with more building (but increasingly can’t….because they can’t drop to meet the demand)?

    Sorry, but I fail to see how such a policy could work, atleast without it backfiring in one way or another.

    • I find it amazing how markets work. Especially when people try to control them. You can always control something but then it quickly leads to another part of the market responding with worse results. Short-term it appears to work and that’s as far as policy makers ever look.