A meeting of the Central Committee of the Communist Party of China was held on July 26, to analyze and study the current Chinese economic situation, and arranged the economic work for the second half of the year. The meeting made clear the macroeconomic policy for the second half of the year. It also offers a chance to view the current Chinese macroeconomic situation.
The meeting stressed a moderate expansion of the aggregate demand, a continuous implementation of a proactive fiscal policy and prudent monetary policy, and an insistence on promoting a series of major reforms. Five major reforms were put forward: overcapacity reduction, destocking, deleveraging, cost reduction and making up for deficiencies. The main measure to reduce cost is to increase the flexibility of the labor market, contain the asset bubbles and lower the macro tax burden, and stabilize the market expectation through macro policies.
The meeting not only affirmed the economic performance in the first half of the year but also pointed out the severity of the current economic situation. As shown by the released figures, the domestic output or GDP in the first half of the year grew 6.7 percent year on year at comparable prices, better than market expectation. In particular, the economic situation showed a better sign in the second quarter of the year. But the main contribution to the economic growth in the first half of the year came from the service sector which increased 7.5%. The main contributors to the economic growth were the network economy and the real estate sector. Especially, the real estate sales rose by over 42 percent in the first half of the year, the highest level in history. However, it should be noted that China’s economic growth still fails to get off the old track of relying on real estate despite the economic restructuring of more than two years.
For instance, the investment increase in the first half of the year was basically attributed to the investment growth in both public infrastructure and real estate while the private economic investment dropped to 2.8 percent, down by 9 percentage points. Private enterprises are unwilling to increase investment, indicating that the economic growth will still face a lot of difficulties in the second half of the year. So, the meeting unusually suggested containing the asset bubbles.
From 2014 to the second quarter of 2016, China’s central bank carried out a series of easing monetary policies like cuts of interest rates and bank reserve requirements. But the economic growth continued to decline. The credit excessively expanded by the China central bank did not flow into the real economy but lingered in the financial system, causing a stock-market bubble in 2015 and an inflated property market bubble since the second half of year 2015. Without controlling the asset bubbles, China’s economy cannot continue to grow and a huge risk looms in China’s financial market.
For example, the housing prices in the first-tier and some second-tier cities went up crazily in the first half of the year. “Land Kings” sprang up. The property bubble is largely related to the China central bank’s excessive credit expansion. In Shanghai, Nanjing and Xiamen, the price of the newly built commercial housing in June went up by more than 30% on a yearly basis, with the housing price growth in Shenzhen as high as 47% year on year.
Although an unprecedented real estate boom was seen in the first half of the year with the housing sales at 0.64 billion square meters, the year-on-year housing inventory actually increased rather than decreased. By the end of June in 2015, the housing space to be sold stayed at 0.657 billion square meters.
In addition, China’s property market was prosperous in the first half of the year as quite a few cities witnessed fast growth in housing prices. However, it was different from what the market saying goes: Residents cannot find investment channels for much of the money in their hands. Instead, it was the consequence of speculation by using the bank financial leverage. Bank loans in China during the first half of the year rose by 0.753 billion yuan and the social financing increased by 0.975 billion yuan, two record-high figures. What’s more, the housing sector increased loans to 0.295 billion yuan, 0.262 billion yuan of which were mid-and long-term loans, accounting for nearly 40% of the entire bank loans in the first half of the year. This is unprecedented in China.
This also means that China’s property boom and growth in the first half of the year was generally the consequence of over expanded bank loans. So many bank loans flooded into the property market. When the housing price increases, that makes everything fine. But now the real estate sector is under a periodic adjustment. If the housing price falls, all the problems will arise. At present, China has the problems of the excessive debts by the local governments, by the enterprises and by the individuals. If the problems reach extremes, there will be no way to solve them. Notably, when the social funds all flow to the real estate market for speculation, these funds not only fail to flow into the real economy but also push up the asset prices comprehensively. A GDP growth driven by fast rising asset prices will surely give rise to huge hidden peril and risk. This form of economic growth is not only unsustainable but also may cause the bubble to burst at any time. This is the fundamental reason why the meeting of the Party Central Committee unusually proposed to control asset bubbles.
All in all, China’s economy did not get out of the difficulty of downward pressure and was mainly fueled by the real estate and the price increase in the first half of the year. Of course, this form of economy cannot sustain itself. If China’s central bank tightens its monetary policy to some extent, the real estate market may start a periodic adjustment. If this happens, economic growth is very likely to feel a downward pressure and China’s economic situation would not look so cheerful in the second half of the year.