‘Beijing Consensus’ same old stuff

Residential property prices in China are collapsing at a faster rate than in the US post-Lehmans, or – to put it a bit less excitedly – by 5.7% in the year to February. So what was a RMB1,000,000 apartment a year ago now goes for around RMB950,000. An innocent bystander might assume that, after surging in 2010 and 2013, prices are simply peaking, so no big deal. But as we all know, a property market is a slow, lumbering beast, and when it starts plodding downhill it can keep going, however slowly, for a very long time.

One of the perplexities and perversities of modern life is that when the cost of food, fuel, clothing, phones or medicine comes down, it’s a Very Good Thing, but when home prices fall, it’s a Very Bad and Scary Thing, at least for a lot of people and many policymakers. The main reason is that it suddenly becomes clear with a massive Doh! that developers and buyers have borrowed crazy amounts of money they can never repay, and banks and the economy face ruin. In addition, China has a system (suggested in the late 1970s by a young Hong Kong patriot/property agent called CY Leung) whereby local governments rely on land sales for revenues needed to pay for public services.

The feeling of impending doom grows stronger. China is sitting on a mountain of bad debt. (How big is ‘a mountain’? No-one’s sure.) One in five urban apartments in the country is
Ordossitting empty. (Maybe. Again, nobody’s certain.) We are also told that the property sector accounts for 15% or 20% of national GDP. (Which is putting the cart before the horse, like arguing that Hong Kong ‘relies’ on Mainland tourists because there are so many of them. A worthless, destructive activity accounts for a fifth of your GDP, therefore it’s vital.)

Note the key common theme running through all this: no-one has a clue. Even basic indicators like GDP growth and inflation are falsified in China, so forget reliable data on non-performing loans or overcapacity of housing stock. Most agree, however, that there is a really huge, serious problem.

So what happens? Why of course – the stock market booms. People have been muttering about the country’s property market bursting, falling or at least subsiding for well over a year. The scarier things look, the higher the stock index goes. The government can’t/won’t allow a mega-collapse, everyone assumes, so it will bail out/stimulate as much as it takes to prop it all up, which translates into more money sloshing around, which will get invested in equities for lack of anything else, so buy now.

A few years ago, chattering Davos types started talking about a ‘Beijing Consensus’. There was a ‘Washington Consensus’ with liberal democracy and free markets, which was a discredited and exhausted joke after the financial crisis broke out in 2007. Now, China was showing the world a new way, with oh-so professional and purposeful authoritarian rule enabling and guiding smooth economic growth that avoided all the bubbles and volatility and waste and the Doh! stupidity you get with the wrecked old Western system. Oh well, nice idea. The reality: China’s policymakers can’t think of anything more original than debt-fuelled bubbles and bailouts and monetary stimulus, after all.

This is a long way of adding to the debate about the famed David Shambaugh essay. With state secrecy and quite possibly ignorance in place of dependable public statistics, any kind of analysis can only be guesswork. Two things we can be sure of are that in China the same rules of economics apply as elsewhere, and the leaders do not seem to have any new ideas.

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4 Responses to ‘Beijing Consensus’ same old stuff

  1. PD says:

    I’m going to — exceptionally — argue that it’s not clear that China is less successful in this respect than other countries.

    In the short-to-medium term the country’s greatly increased prosperity has been not far short of a miracle. Agreed, there has been much “collateral” damage (thanks, Macnamara or someone); and other countries, like France in the 30 glorieuses, have achieved something similar. But the mere scale of the increase in GDP is staggering.

    People used to say the Chinese political system, concentrated in the hands of a single man, might only be so effective until it became time to hand on the power. But chairmen, sorry presidents, have come and gone and the jury is still out.

    To attempt a slightly risky comparison, some of America’s repeated foreign wars could be justified if they won, but clearly not otherwise.

    If China manages to keep the economy under control, helped by the exchange controls and a hitherto expanding economy (some countries would die for a 5% growth rate), then I will be among the first to applaud.

    With respect, Hemlock, economists, bankers and the like don’t really need much creativity or originality. Just being in the right place at the right time (George Harrison) can go a long way.

  2. Qian Jin says:

    @”We are also told that the property sector accounts for 15% or 20% of national GDP”

    So the big deal?

    What about Hong Kong’s property sector as percentage of “GDP” ? This should have you worried if you own a flat here which is mortgaged to a bank.

    Me thinks you are writing about the wrong administrative region. You really must get away from this constant China bashing Hemlock.
    When did last tour around the Mainland and see their progress………….and green, well laid-out with clean streets………………. and quite a few smiling faces ? In fact more than you will see in Thailand these days.

  3. NIMBY says:

    I wonder who lost more money and got less for losing it. The US Banking collapse and bailout, or China’s bridges, highways and cities to nowhere. One thing for the USA, you can burn useless bonds instead of having to pour more money into maintaining them, but on the whole, it’s hard to say which is worse.

    A friend sent me an email about our own bridge to no where, the 3rd runway that leads to airspace we don’t control, which I’ll quote some parts about here.

    An airport runway that the airlines can’t really use? Sounds about right.
    Everything the SAR government (under the CCP management) builds never considers the user. That’s why in China they have all those empty apartments, unused highways and bridges to no where, airports with no flights, etc; over the boarder. CY is just trying to be a patriot and learn from the motherland.

    Honestly, even under the British there was a lot of lets build stuff to give sweeteners to construction firms with UK ties (and a few of these firms are still around, they have built up their connection with the local oligarchy).

    All of these things are built without thinking about the user. Just went to the Taipo Waterfront Park with my son’s school yesterday. The “Insect” house is a typical museum in HK, no budget to run the thing. It was built to give away money to well connected construction firms, without a thought as to what would go in the thing later. As a result, all the display cases are built so high that children can not see into them. There is only one live insect display, a small ant house kit, purchased from a toy store. The rest of the museum is full of terrible fake plastic insects and a few dry insects, there is almost no education material, etc. It’s pretty much the same story at all the museums in this place, from our harbour front performance art center that has no windows to view the harbour, to a crappy teapot museum set up to house the collection of some putz who got tired of taking care of his own collection…

    Same with parks, it’s just pour concrete as that’s what the construction companies want to do, without a single thought as to how children can play in them.

    The whole game is patronage, even the people who run most of these places have no idea what they are doing, and are hired because they are connected. The zoo in central has managed to kill off two panthers, a couple of orangutans, a crocodile, loads of rare birds, and other animals. They even killed off their two raccoon, which most Americans will tell you are damn near indestructible pests.

  4. Scotty Dotty says:

    Well said PD: “…economists, bankers and the like don’t really need much creativity or originality. Just being in the right place at the right time (George Harrison) can go a long way.”

    How many analysts and bankers in this town would have been barrow boys in Yorkshire, farm boys in Australia, suburban zeroes in Canada, but came to Hong Kong with a degree in economics from a second rate university and, voila, rich beyond their dreams.

    And Alan Semen… biggest lucky spotter of all time?

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