In its latest Article IV country report on China, dated June 27 2011, the IMF reported on the potential for a property bubble, on the state of China’s banks and on the policy measures underpinning the 12th Five Year Plan. It also looked at the international implications stemming from China’s efforts to rebalance its economy by de-emphasising exports and raising domestic consumption. (Another strand to this “rebalancing” is a commitment to supporting the relocation of industries to the interior instead of having them clustered at the seaboard metropolises.)
Rebalancing, in the sense of moving from being export driven to having a much higher domestic consumption component, is something that it is far harder to say than it is to do. The Chinese authorities can, of course, decree anything they want, but that doesn’t always mean that their decrees will play out in the way that they expect.
Looking to the future
On the macro economic front, China sees the necessity of continuing to drain excess liquidity out of the system if it wants to squeeze down on rising inflation, and withdrawing the huge stimulus that it gave to the economy during the downturn is an obvious part of that. But the Chinese government is in a bit of a bind on this. In any developed economy tighter monetary policy would mean raising interest rates. China may want, on paper, to dial back exports, but it wants to do so in a gradual fashion without shooting both its feet off. Raising rates would cause the Renminbi to appreciate, probably a good bit faster than the authorities would deem sensible, and it would hammer China’s exports by eroding their price competitiveness. So it much prefers to tighten policy by raising bank capital requirements, raising loan-to-value ratios, raising credit criteria and so on.
That is all well and good, the IMF says, but rate hikes have a role and should be tried. It also wants China to run a more balanced budget and to reorient tax and expenditure policies to boost domestic consumption. However, the IMF is a fan of China’s 12th Five Year Plan. The Plan sees the importance of raising household incomes and of putting more by way of a social safety net in place so that the average citizen does not have to spend their days hoarding cash to pay for any medical or other calamity that might afflict them. The main reason the Chinese are among the world’s greatest savers, after all, is that each and every one of them know there is nothing there to catch them if they or their family fall victim to any of life’s vicissitudes. If China does indeed manage to build a robust safety net system from scratch, then that will have tremendous importance in freeing up domestic savings for higher rates of consumption. The implications for the global economy if that happens are purely positive.
China is talking about implementing significant financial reforms and liberation. The IMF would like to see it go all the way and make the transition to market-determined deposit and loan rates in its commercial banks, and to open the capital account.
Haunted house-ing market
As to property bubbles (see my recent blog on this theme, The Chinese government, the DTZ and the "property bubble"), the IMF is satisfied that the Chinese government’s efforts to slow the rapid pace of increase in property prices is indeed working. In the first five months of 2011 residential propertly prices on average rose 7% over those of previous years and transactions volumes have been discretely lower. The Chinese government banned the purchase of properties for second homes or for speculative purposes and that has dampened down the market considerably.
The IMF is not entirely convinced that the threat of a property bubble has gone away yet, however. It’s concern is based on the fact that the property sector (commercial as well as residential) makes up about 12% of GDP. The property sector is also completely wired in to the health or otherwise of key industry sectors such as the steel and cement industries, and, downstream, it is just as tightly connected to white goods manufacturers, furniture outlets and so on. A property crash, if one were to happen, would severely impact growth in China, with enormous knock-on effects for the fragile economies in the west.
As a final note, part of the driver for investment in property in China is that there was very little else to attract the savings of the ordinary citizen. The Chinese government still has much work to do on that front too...
Original article published on the QFINANCE blogs page by Anthony Harrington