China’s Economic Fundamentals Exposed
With 8.5% of the Shanghai Composite wiped off on Black Monday, the risky world of speculative capitalism is under the microscope. As Steve Keen reminds us, Chinese private debt was very low post 2008, but debt to GDP has since grown by 80%. A hefty 35% jump in private debt to GDP occurred in 2010, outgunning the worst of the Japanese excesses (25%) and made the USA look responsible with its’ mere 15% growth.
The next question obviously is – what was the money was borrowed for? The rise of Chinese land and house prices has been well documented. In June 2014 I warned of looming troubles with reports of land turnover falling 45% year on year in China Watch – land turnover ‘plunge’ a predictor of recessionary forces.
A paucity of Chinese data makes it difficult to track further land sales data. But every now and then we get hints, such as Shanghai land sale volumes plunged 103.7% in the year to April 2015.
Whilst this is far from a thorough investigation of the role high land prices play, we do remind you of Gavin Putland’s in depth post GFC analysis of 36 nations in the From the Subprime to the Terrigenous report. Putland demonstrated how land sales turnover acts as a pre-cursor to economic recession.
Let’s step through the cycle:
- Land prices reach a new high beyond what wage earners can realistically afford.
- Experienced investors realise the economic fundamentals no longer relate to reality, reducing demand.
- Land banking developers try to manipulate the market, reducing supply in order to choke prices. That plays out over 3 – 4 quarters.
- Banks get concerned, warning developers not to drop prices or margin calls will occur.
- Developers offer free cars, furniture or carpet to entice purchases in order to maintain the inflated land price, playing out over a number of months.
- Land bankers have no option but to reduce land prices on the back of low land sales turnover.
- Banks make margin calls, calling in the difference between loans given and the value of land holdings at current market prices.
- Developer bankruptcys build.
- The wider economy starts to weigh down under the pressure high rents and mortgage payments place on consumer spending.
And so the script goes. We are currently seeing the Chinese sharemarket take its part by shining a light on the fundamentals. Bloomberg reports:
Stocks on mainland (Chinese) bourses trade at a median 61 times reported earnings, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than three times the 19 multiple for the Standard & Poor’s 500 Index.
The concern for economic reformers is that much of the boom-bust mentality is built into the Chinese economic system. Local councils facing urban growth pressures rely on one-off land sales to fund services. This has on occasion led to violence between farmers and government, with calls of land grabs by corrupt officials often the criticism by farming communities. The Cheong Kong Graduate School of Business points to how local government relies on up to 35% of all revenue from one-off land sales. They go on to say:
But selling land is barely a sustainable source of income, as Beijing has set up a mandate to maintain at least 297 million acres of farmland to feed the world’s largest population; and with 334 million acres of farmland available today, there are limits to how much more can be sold.
Those limits equate to just 11.1% of agricultural land remaining for sale, adding a peculiar complexity to inter-generational inequity. Local authorities urgently need to transition to a yearly land value tax that will encourage more efficient land use and a regular income stream for councils. This will require a considerable cleaning up of Chinese land titles records and a further commitment to biennial land valuations at the least. Some fear the Chinese and their 53 million plus vacant homes may lead to what happened here in Melbourne in the 1890 – 1910 period, where barely a new house was built after the stratospheric 1880s housing bubble led to a chronic oversupply. That would spell doom for the Australian mining industry and with that the wider economy. Unemployment pressures are mounting as car manufacturers close in the next 24 months, infrastructure projects continue at record lows and a lack of economic vision persists from the Federal government.
However, the call for meaningful tax reform continues to grow. Read this canny piece in the New Philosophers Magazine on the history of our favourite boardgame – Monopoly.