China’s Rental Market Flooded with Listings as Rents Continue to Slide - The reality of more listings and lower rents is here to stay, says CRIC report
It’s a little funny that Chinese media even does the “But at what cost” thing.
First, I’m not going to pretend to be able to solve a longstanding contradiction and the diametrically opposed central-provincial relations that have recurred throughout various dynasties in China over the past couple thousand years (which dates back to the Northern Dynasty in the 4th century CE with the emergence of feudal oligarchies in the form of Guanlong group and their imposing influence on the imperial court and the emperors themselves)
The cyclical pattern of strong central governance ultimately led to consolidation of power at the top accompanied by an increasingly inefficient bureaucracy, and eventually the decentralization of power that promoted regional growth but at the expense of the growing influence of local officials with powers to undermine central authorities.
However, there are a few key issues that will need to be reformed almost immediately:
One, The KPI of local officials that rely on GDP growth numbers has got to go. Local officials get their promotion by handing in a stellar GDP growth numbers on their report cards, and you can easily cheat that number through over-investment in housing and infrastructure without necessarily building a balanced economy that benefits the wider society. From the perspective of the local governments, overcapacity is a problem left for the central government to solve. If they’re going to get away with driving GDP numbers through building more and more houses, then they’re going to do it.
We need to change the KPI such that local officials formulate the developmental plan based on the needs and welfare of the people, not just to blindlessly drive the GDP numbers up.
Two, We need central planning to come back. The lack of central planning led to reckless local government initiatives that ultimately caused a highly imbalanced economic development. Don’t get me wrong, the decentralized aspect of the Chinese model allowed many industrial sectors to punch way above their weight when it comes to accelerated development. However, even Xi himself remarked recently that not every province has to produce EVs, solars, etc - because of the oversupply issue.
I’ll give you one example: unleashing land capital can be a very powerful driving force in economic growth if it had been properly planned and coordinated. Think about this: you build a new city, you first stimulate the construction sector, raw materials (concrete, steel, etc.), then, as people start to move in, they will have to renovate their new homes, purchase home appliances, and this will stimulate a further wave of industries. Finally, as the new residential areas flourish, other businesses like grocery stores, restaurants move in, and stimulate the growth of yet another wave of industries. If done properly, you can extend the cycles almost indefinitely.
However, what transpired in China was the exact opposite. Driven by the national priorities set during the “4 trillion yuan stimulus” and the 12th Five-Year Plan that promoted infrastructure expansion, and the 13th Five-Year Plan that prioritized green technology, you ended up with the local governments fiercely competing with one another to build the most houses, the most high-speed rails, giving the most subsidies to attract businesses for solars, EVs, etc. All in the name of driving GDP growth numbers.
As a result, you get a proliferation of thousands of new cities that simply will not find occupants. It is no coincidence that the “ghost cities” planned during the 2000s eventually found occupancies and flourished, but the thousands that were recklessly built in the 2010s are now left abandoned. You have entire residential areas where there are no schools, no hospitals, no supermarkets, no restaurants and have to drive 45 minutes to the nearest urban area to access these public infrastructures.
Three, and perhaps most importantly, the complete revamp of the monetary system that would allow government to deficit spend in large quantity to stimulate the economy.
I have mentioned many times that the economics profession in China, like many others, is deeply rooted in Western neoclassical theories. Because of the need to “balance the budget”, a lot of the capital used for infrastructure building were actually borrowed (through various financial sources through shadow banks, and after 2015, through municipal bond issuance) rather than direct central bank money creation. This led to reckless borrowing by the local governments to drive up their GDPs, and now they are stuck in a situation - because of the falling property prices, the slump in export sector as well as the deflationary spiral - where the overhanging debt becomes increasingly difficult to repay.
None of this would have happened if the government simply deficit spend the money needed to drive the economic development. No need to borrow from financial institutions or other private creditors at all. It would violate the sanctity of the market principles that IMF has set, but who cares lol.
First, I’m not going to pretend to be able to solve a longstanding contradiction and the diametrically opposed central-provincial relations that have recurred throughout various dynasties in China over the past couple thousand years (which dates back to the Northern Dynasty in the 4th century CE with the emergence of feudal oligarchies in the form of Guanlong group and their imposing influence on the imperial court and the emperors themselves)
The cyclical pattern of strong central governance ultimately led to consolidation of power at the top accompanied by an increasingly inefficient bureaucracy, and eventually the decentralization of power that promoted regional growth but at the expense of the growing influence of local officials with powers to undermine central authorities.
However, there are a few key issues that will need to be reformed almost immediately:
One, The KPI of local officials that rely on GDP growth numbers has got to go. Local officials get their promotion by handing in a stellar GDP growth numbers on their report cards, and you can easily cheat that number through over-investment in housing and infrastructure without necessarily building a balanced economy that benefits the wider society. From the perspective of the local governments, overcapacity is a problem left for the central government to solve. If they’re going to get away with driving GDP numbers through building more and more houses, then they’re going to do it.
We need to change the KPI such that local officials formulate the developmental plan based on the needs and welfare of the people, not just to blindlessly drive the GDP numbers up.
Two, We need central planning to come back. The lack of central planning led to reckless local government initiatives that ultimately caused a highly imbalanced economic development. Don’t get me wrong, the decentralized aspect of the Chinese model allowed many industrial sectors to punch way above their weight when it comes to accelerated development. However, even Xi himself remarked recently that not every province has to produce EVs, solars, etc - because of the oversupply issue.
I’ll give you one example: unleashing land capital can be a very powerful driving force in economic growth if it had been properly planned and coordinated. Think about this: you build a new city, you first stimulate the construction sector, raw materials (concrete, steel, etc.), then, as people start to move in, they will have to renovate their new homes, purchase home appliances, and this will stimulate a further wave of industries. Finally, as the new residential areas flourish, other businesses like grocery stores, restaurants move in, and stimulate the growth of yet another wave of industries. If done properly, you can extend the cycles almost indefinitely.
However, what transpired in China was the exact opposite. Driven by the national priorities set during the “4 trillion yuan stimulus” and the 12th Five-Year Plan that promoted infrastructure expansion, and the 13th Five-Year Plan that prioritized green technology, you ended up with the local governments fiercely competing with one another to build the most houses, the most high-speed rails, giving the most subsidies to attract businesses for solars, EVs, etc. All in the name of driving GDP growth numbers.
As a result, you get a proliferation of thousands of new cities that simply will not find occupants. It is no coincidence that the “ghost cities” planned during the 2000s eventually found occupancies and flourished, but the thousands that were recklessly built in the 2010s are now left abandoned. You have entire residential areas where there are no schools, no hospitals, no supermarkets, no restaurants and have to drive 45 minutes to the nearest urban area to access these public infrastructures.
Three, and perhaps most importantly, the complete revamp of the monetary system that would allow government to deficit spend in large quantity to stimulate the economy.
I have mentioned many times that the economics profession in China, like many others, is deeply rooted in Western neoclassical theories. Because of the need to “balance the budget”, a lot of the capital used for infrastructure building were actually borrowed (through various financial sources through shadow banks, and after 2015, through municipal bond issuance) rather than direct central bank money creation. This led to reckless borrowing by the local governments to drive up their GDPs, and now they are stuck in a situation - because of the falling property prices, the slump in export sector as well as the deflationary spiral - where the overhanging debt becomes increasingly difficult to repay.
None of this would have happened if the government simply deficit spend the money needed to drive the economic development. No need to borrow from financial institutions or other private creditors at all. It would violate the sanctity of the market principles that IMF has set, but who cares lol.
Thanks for your insight comrade, informative as always. Are you aware of a faction within the party that is aligned with your perspective?