Among all the key takeaways of the recent Central Economic Work Conference, two priorities draw special attention.
One priority is the promotion of the stable and healthy development of the property market. The conference emphasized the urgency of curbing property market bubbles and speculation. One of the highlights in the Chinese economy over 2016 was the rampant rise of property market prices, starting in Beijing, Shanghai and Shenzhen, and then quickly expanding to a number of the second tier cities, namely Nanjing, Suzhou, Hangzhou, Hefei, Xiamen and Wuhan. It only quieted down somewhat after exceptionally stringent measures announced in late September across dozens of cities.
According to the People’s Bank of China (PBOC) official data, outstanding long term consumer loans, mostly home mortgage loans, were 19.36 trillion yuan at the end of November, 2016, 29.1% up over that at the end of January, or a net increase of 4.37 trillion yuan. Forty-eight percent of the total net increase of total bank loans (9.10 trillion yuan), although its total volume accounts for 17.5% of the latter. The fundamental factor behind the sharp property market rises is speculation, buying a house only to sell it later, making considerable profit in a fast-rising market. Hence, houses are no longer living quarters but a financial tool, only for the increase in their face value. The capital, in chasing profits, chases the house deals. Local governments, hungry for money, play a key role in pushing up land prices. In turn, the banks tend to extend mortgage loans to home buyers, not caring whether they are speculators, because they have houses as mortgages.
The first consequence is that any further rises in the property markets will lead to a higher debt ratio, and a significant property price fall will definitely lead to a chain of disclosures and bank insolvency risks, and in turn, lead to a systemic financial risk in the country. In that event, the financial crisis will be not far away.
The second consequence is dampening the real economy. Property market speculation and bubbles are sucking financial resources at the cost of the real economy. During the first 11 months of 2016, outstanding bank loans to the non-financial business and institutions increased by a merger 4.5%, or a net increase of 3.14 trillion yuan. Its share in total outstanding bank loans fell from 70.0% to 65.2%. Property market speculation usually has a much higher capital return than the real economy, especially manufacturing. TCL, a leading manufacturing giant, also relies on real estate development for a better overall performance. Haier, the world leader of white home appliances, also has huge land plots for real estate development in Qingdao, Jinan, Chongqing and Suzhou.
It is nothing new to reaffirm the nature of housing as for living instead of for speculation. Two years ago, the State Council decided to foster housing consumption and made clear its consumption nature. It is, however, unusual that the Central Economic Work Conference, with this explicit position, gave a strong signal that the central government will no longer tolerate the property market bubbles and capital speculation, and all financial, land, tax and legislation measures will be prepared for this purpose. It is expected that more policy tools, including heavy taxes on house trading profits, will be on the horizon so as to make it unprofitable at all.
Another priority is a strong emphasis on fostering the real economy. Instead of the hot media words of internet finance, virtual reality, sharing economy and so on, the conference put quality and core competitiveness at the central piece. It means that in the real economic sectors must rely on advances of technology and productivity. What is equally import, the conference did not mention internet plus, but stresses the growth of strategic emerging industries on the one hand, and the upgrading of traditional industries on the other. In recent years, remarks either by the State Statistics Bureau or local governments tend to mention the growth of strategic emerging industries while neglecting the traditional ones. Don’t forget: the strategic industries only accounted for 11.2% of total above-scale industrial output added value in 2015. If there is no growth in the traditional industries, even if the former grows at 15% per year, total industrial output added value could only grow by 2% per year, making 6.5% GDP growth rate unattainable.
The conference calls for “craftsmanship”, brand build up and fair competition for small, medium and micro business. In this regard, we should learn from the German “invisible champions” who are mostly small business, rely on the world’s finest craftsmanship and offer excellent products with world famous brands.
Internet finance, which is an extremely hot word in China, is not mentioned in the official news report of the conference. Instead, it calls for further improving the governance architecture of the state-owned commercial banks and promoting development of private banks. The private Sunning Bank, approved right after the conference, will focus its business both online and offline on supporting the real economy. Another clear signal is thus given that internet finance, while a new model of financial activity supported by internet technology, is only a tool of finance. The financial services, be it online or offline, must serve the real economy instead of a capital movement chasing profit only.
Looking into 2017, the Chinese economy, in the process of further supply-side reform and structural changes, must be anchored on a sound real economy, with maximum technology support and minimum property bubbles and capital speculation. Only then, a stable growth at 6.5% (GDP growth rate), with less financial risks, could be secured.