Why is China suddenly seeking to share prosperity? This chart has something to do with it:
If you want to rebalance your economy from investment-led crony capitalism and an increasingly risky export dependency to consumption then you’re going to need strong households, not the above.
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The way to do it is to shift more of the share of national income to workers and away from pampered rentier profiteers.
Moreover, this redistribution of income had better be shared across different classes if you want to lift consumption meaningfully. Overconcentration of wealth and income in too few hands is as dangerous to consumption growth as any supply-side fixation.
The CCP’s latest reform program is not some idle attempt to recapture lost legitimacy. It is an appropriate (desperate and perhaps determined) endeavor to dodge the yawning maw of the middle-income trap.
Central to this project is the reining in of runaway capital misallocators like the property sector. Empty apartments do not add to production and create an enormous debt hangover that sucks income dry over the long run.
We have seen China time and again try to achieve this. In 2015, it crashed property prices and sent iron ore to $38 before finally panicking with more stimulus.
Now it is trying again with the Three Red Lines policy that directs property developers to deleverage. That has led Nomura to conclude that this time China may be serious:
Beijing’s unprecedented determination to curb the property sector could be China’s “Volcker Moment” as it will cause a “significant” slowdown in economic growth, according to Nomura Holdings Inc.
Unlike in previous economic down cycles, Chinese authorities look set to tighten property sector policy and tame prices this time, in order to reduce wealth inequality and boost the falling birthrate, economists led by Lu Ting wrote in a report Tuesday. Policy makers will be willing to sacrifice near-term economic growth to tame house prices and divert financial resources out of the property sector, which accounts for a quarter of China’s gross domestic product, they wrote.
A “Volcker Moment” refers to a policy change like the decision by the Federal Reserve under former Chairman Paul Volcker to quickly raise interest rates to 20% to contain the inflation of the late 1970s. That sudden change caused a jump in unemployment but also led to inflation slowing.
“Markets over the near term need to be prepared for a likely marked growth slowdown, more developer defaults and home foreclosures, and perhaps some turmoil in stock markets,” the economists wrote.
Authorities appear to be determined to expand the property tax scheme from trials in Shanghai and Chongqing cities to the entire nation, according to the report. This will address wealth inequality and help replace local governments’ income from land sales, which will be reduced by the ongoing curbs, the report said.
I agree. For authorities to backflip to more property stimulus will now involve an enormous loss of face. Moreover, the key to delivering economic restructuring is a common narrative that holds rent-seekers feet to the fire. To backflip on that now will blow a huge hole to the overall project. That why in every new public commitment in the past six months, policymakers have doubled down on reform.
While this continues, commodity prices will keep falling.
The question is will policymakers hold the course when it becomes inescapably obvious that growth is going to fall to 3% and below?
I remain skeptical.