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Guard against Regressions in China’s Macroeconomic Policy

Nov 11 , 2014
  • Yi Xianrong

    Researcher, Chinese Academy of Social Sciences


Because of the downward pressure on current Chinese economic growth and the possibility of a real estate market crash, the Chinese central bank and the China Banking Regulatory Commission launched a new housing credit policy on October 1, 2014. This policy is to increase demand for housing on the one hand and, on the other hand, its purpose is to use this new housing credit policy to boost housing demand, creating a prosperous real estate market and getting China’s economy back to a fast track of growth.

The new policy will not only disrupt the ongoing periodic adjustment of the Chinese real estate market and cause a change in market expectations, but also implies the end of the “micro stimulus” economic policy implemented by Premier Li Keqiang in the last two two years. The new policy is not simply a real estate policy in nature. It uses excessive preferences to stimulate the generalized housing consumption, so as to rescue the declining real estate market because of decreasing prices. But more than this, it uses real estate as a tool of macroeconomic regulation, pushing China’s economic growth back to the old road of a “real-estate-based economy” over the past few years. The new policy shows that the Chinese government still hopes to guarantee economic growth and resolve all kinds of crises and problems in the society and the economy (such as the local government’s financing platform crisis and overcapacity, etc.) through the prosperity of real estate. It is why the Chinese macroeconomic policy has shown signs of a comprehensive reversal.

After the 18th National Congress of the Communist Party of China (CPC) and the Third Plenary Session of the 18th Central Committee of the CPC, the Chinese government intentionally turned its “real-estate-based” economic growth mode into a high-quality and high-efficiency economic growth mode, greatly changing the direction of the macro policy. For example, the government implemented directional control over the monetary policy, accelerated the deregulation of its administration, and vigorously transformed the government function, as well as promoted the development of the private enterprises, etc. Thus, over the past few years, the Chinese government did not give much voice to the macro regulation of the real estate market, except placing emphasis on building affordable housing and rebuilding shanty areas. Meanwhile, over the same period, the government basically gave up real estate as a tool of macroeconomic regulation, hoping to regulate the housing market through economic leverage. After persistent fast growth for more than 10 years, the real estate market began to undergo a nationwide periodic adjustment. The Chinese real estate market bubble was gradually squeezed out in this process.

However, the periodic adjustment of the domestic real estate market not only touched the big interest groups, but also affected the local governments’ land-based finance and China’s GDP growth. Additionally, the risk of bank loans and the local governments’ financing platform also began to appear. Thus, China’s GDP growth was under greater downward pressure. Faced with this situation, Premier Li Keqiang expressed that the Chinese government would not let economic growth slow down by a large margin, and promised to revive the slower Chinese economy in 2014, so as to enhance investors’ confidence in China’s economy.

In order to showcase the difference from the four trillion “strong stimulus” during the financial crisis in 2008, people called Premier Li Keqiang’s economic policy a “micro stimulus”. Some research has shown that this “micro stimulus” economic policy can not only increase China’s GDP by 1 point, but also can really promote the transformation of China’s economic growth mode, change China’s decade-long “real-estate-based” growth mode and lead China’s economy to a real road of efficiency and quality.

But the introduction of the new housing credit policy seems to have reverted the current “micro stimulus” policy back to the 2008 strategy of a “strong stimulus” of macroeconomic regulation. On the surface, the new policy emphasizes continuous support of “reasonable family housing consumption.” But this “housing consumption” is intended for widespread demand instead of real residential housing consumption.

Literally, home purchases encouraged by the new policy falls into the concept of “housing consumption”. But in reality, it encourages housing speculation. Especially when the domestic housing market price remains at a high level and most home buyers are unable to enter the housing market, only the speculative investors enter the housing market while the real home buyers are basically ruled out. The new policy is actually targeted at creating a prosperous real estate market and stimulating economic growth, because it encourages speculative investors to flood into the market by taking advantage of the preferential policy. In this case, the new policy may become much stronger than the “strong stimulus” of 2008.

The core of the “strong stimulus” of 2008 was not the fiscal policy of RMB¥4 trillion but the excessive easing bank credit policy. The credit policy boosted investor demand and speculation in the real estate market. For example, from 2009 to 2013, China increased the bank credit by RMB¥45 trillion (much higher than the total bank credit in the past 64 years) to push faster growth of the domestic real estate market and fast GDP growth. Generally speaking, the money supply by the bank credit is much larger than the basic money supply by the central bank (for example, the ratio between them in Hongkong is 9:1). If the new policy encourages speculative investors to enter the market through excessive preferences, this bank credit will have a stronger incentive than that of 2008, because this generalized housing consumption covers more areas, produces more preferential credit and encourages banks to supply more credit. Of course, although the implementation of the new policy deviates from its purpose, the above analysis indicates that the new policy implies a substantial change in the idea behind the domestic macroeconomic policy.

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