Monetary policy looks good on paper, but may have little effect on the ground.
Fang Shihan reports.
“THE RICH people buy up so many houses here that they’re driving up inflation!” remarks Hao Fei, 27, an English teacher at the Henderson Foreign Language school in Kunming, Yunnan.
Property is hot in China. Not only because social norms dictate that a male must own his a house before he’s deemed worthy enough to take a bride, but also because of rampant speculation.
Hao Fei bought his apartment 4 months back for 400,000 yuan (S$78,000). He reckons that he could sell it off for 500,000 yuan now. With a middle class salary of 6,000 (S$1,175) a month, he’ll take 30 years to pay off his bank mortgage.
He’s unhappy, however, that he is living in an asset worth half-a-million.
“Of course I can sell my house and earn a profit. But where will I live? Houses everywhere are getting more expensive as well!”
Nearer to the heart of Kunming, where the likes of KFC, the Big M and yes, even Breadtalk have sprouted within walking distance of each other, apartments owners literally live in million-yuan homes.
Little wonder then, that cash-rich Chinese are riding the bubble by buying their second and third houses. After all, what’s a million-yuan when the returns could potentially amount to 1.5 million yuan.
Government measures to cool the property market have been effective, but inflation is still rampant. Overall inflation remains high at 5.1% while food inflation stands at 10%.
According to Professor Zhang Jian Hua at Yunnan University, the crux of the problem lies in China’s lax monetary policy.
As a reaction towards the flood of liquidity unleashed by US’s own loose monetary policy during the recent depression, the Chinese government is now taking measures to rein in easy money, partly to curb property speculation.
“Property is not so easy to buy if you don’t have guanxi. The bulk of the warehouses in this estate have been reserved for friends and family of the developer. Outsiders like us have to pick from the leftovers.” – Yang Bo, business developer
Previously, homebuyers only had to pay 20 to 30% of the sum upfront and take a bank loan for the remainder. This now only applies to first-time buyers. Individuals looking to buy their second house now foot 50% upfront while third-timers pay the full sum in cash. But that’s only for housing. Speculation is still rampant in the commercial sector.
Yang Bo, 32, owns a chain of music schools in and around Kunming. He’s just bought the first floor of a 6-storey warehouse, intending to use the space as a warehouse retail outlet for his pianos.
“The developers wanted me to foot an additional 300,000 yuan when they agreed on 5 million yuan a few days ago. Now everyone’s holding back on their sales, hoping for the prices to increase.”
Still, he says the terms are good. With a 16% cashback incentive payable over two years, he says that by jumping in early, he’s saved himself 814,400 yuan.
“Property is not so easy to buy if you don’t have guanxi. The bulk of the warehouses in this estate have been reserved for friends and family of the developer. Outsiders like us have to pick from the leftovers. But it’s still a good deal because the area is near the distributorship cluster.”
An oversupply of liquidity over the past two years has also led to rising food prices, indicative by the Consumer Price Index (CPI) which stands at a 28-month high.
Lowering the logistical costs of agricultural produce and releasing some state food reserves, the government has managed to stabilise the prices of grain and cooking oil. Wholesale prices of vegetables have even gone down, according to Xinhua.
“That’s still not addressing the problem” says Professor Zhang.
With price controls in place, the Chinese farmers working with already low profit margins have even less incentive to be productive. He insists that there should be more investment in the agricultural sector instead. But such a policy would not have an immediate effect.
Remarking rather pessimistically, he mentions that it would also be half a year before current monetary policies have a tangible impact on the daily lives of the ordinary Chinese.
The People’s Bank of China (PBOC) has hiked the reserve rate ratio (RRR) for the sixth time this year. Banks now have to park 18.5 percent of their reserves with the central bank. This decreases the level of liquidity or put simply, gives banks less money to lend.
Speculators may now find it more costly, or even impossible to get a loan because the banks are, well, short of money.
Other policies such as the oil price hike (in anticipation of rising demand) and gradual appreciation of the Yuan (to fight imported inflation), and the recent rise in interest rates (leading to less incentive to borrow and more incentive to park one’s cash in the bank) too may look to be effective in combating inflation, but could in fact make little difference on the ground in the short run.
Can China sustain this rate of economic growth while keeping inflation at bay? While the authorities insist that existing monetary policies should serve to slow down speculation while maintaining fiscal growth, reality seems to suggest otherwise.
The liquidity crunch unfortunately still does not address problems such as the one Yang Bo is facing. Developers are hoarding property in the hope of future price increases – this has little to do with how easy or difficult it is to obtain loans.