From the FT today comes a nice wrap of the state of things in China from Jay Pelosky, principal of J2Z Advisory:
…A residential property bubble does exist – in fact, declining transaction volumes and price reductions suggest it is already deflating. Yet this is a problem policy makers are well aware of and for which multiple tools exist to mitigate the threat of a crash.
A property crash would be socially explosive given that it often takes three to four individual pools of savings to meet the 30 per cent down payment requirement. There is every reason to expect the authorities to act with vigour here.
…Second, pollution and the anti-corruption campaign bookend China’s economic policy flexibility. Beijing’s pollution is well known but every mile of the 800-mile bullet train trip to Shanghai provided visible evidence of a much greater concern. Pollution encapsulates today’s China; it is a known and highly visible problem that has yet to be fixed. Of course, attacking the problem means shutting down factories and throwing people out of work, which is difficult to do in a downturn.
…The anti-corruption campaign is unprecedented in its scope and implication for the economy and society at large. Political patronage networks that extend the length and breadth of China are now being rolled up, leaving great uncertainty in their wake. The campaign seems quite popular on the street but in the boardroom it elicits fear and uncertainty, neither of which is pro growth. This campaign represents a virtually unquantifiable risk across many fronts, especially with regard to the state-owned enterprise reform process.
All these issues emanate from the massive 2009 stimulus programme. Widely and erroneously seen in the west as a sign of Chinese macroeconomic flexibility and management skill, it is viewed quite differently in China…The stimulus programme resulted in massive misallocations of capital that will trouble China for years as projects come on stream to a much weaker demand profile. Credit crunch risk is apparent; capital efficiency is a major challenge.
That about sums it up, yes. But note the contradiction. Pelosky advises that the Communist Party must deal with corruption and pollution lest either threaten its rule. Yet the property bubble will be supported to the ends of the earth, even though it’s at the very centre of corruption and pollution via the local government land seizure sale and develop model, and the filth belching steel that goes into the ensuing apartments.
I don’t think these issues can be so easily separated. Neither do markets, which still think that China will buckle and re-stimulate when the pain gets great enough. I agree, though differ on the outcome. Further stimulus will be smaller and more targeted, and serve largely to ease the passage down to Western levels of growth as fixed asset investment falls inexorably.
