I know I plague you with this stuff. But if or when it shifts you will be able to watch the resulting Tsumani heading your way from your bedroom.
China’s central government says it wants to reign in its bank and property bubble. The problem is, nobody else does. The other intersted parties in the property bubble, the banks, speculators and Regional governments all want it to continue.
When the central government told the banks they should lend less and there might be a limit set for lending, the banks went on a lending bender. Raising capital requirements has been about as effective a restraint on lending, as leanding back in your seat is, as a way of slowing your car.
Now local governments are doing their bit to thwart any possible restraint. The problem is, that the largest source of local government revenue, about 43% all on its own, comes from selling government land to speculators. Land sales, give Local government autonomy from Central government and, more importantly, give them a way of competing with other regions. A region that sells land, attracts speculartors and creates a property bubble can become one of China’s regional power-houses. If they don’t, they remain a backwater. So the logic for them is simple.
So, while one part of Central Government, which looks at Banks and finance policy, talks of restraining lending for land sales and controlling spiralling prices, another part is blissfully going in a completely different direction. The Ministry of Land and Resources just announced a monster increase in the amount of land it will supply for sale to propery specualtors and builders. 180,000 hectares this year alone which is a 135 % jump over last year’s supply. Sounds like restraint to me.
Last month Shanghai said it would transfer a record 105 plots of land totalling 5.39 million square meters for commercial and residential development. 2.38 Million meters of this is for residential. Which is an increase of 780% over the same period last year, ’09! Beijing is up 278%! Not to be left behind, this month, Guangzhou said it would auction 5 million square meters of residential land, which is the entire year’s allocation in one go.
This reminds me of how how the banks, when the central government talked of restraining bank lending, suddenly went on a lending bender and splurged the whole year’s allocation in 4 months. Sounds like the banks have given their friends in local government some advice.
The Cental government wants to reign in out-of-control prices but local governments don’t want to lose revenue from land sales because land sales are what they gorge themselves on. The dangerous fact is, that financial growth is now firmly tied to property sales and inflating prices. This is a bubble in its mature stage, getting away from effective control, heading for a bust.
What to do? Well the Central government had an idea. Why not impose a property tax and let local governments get revenue that way? Sounds rather good. The problem is it may be too late. A tax would give local governments a vastly more sustainable revenuse stream, but it is a stream that WOULD reduce growth. Builders and specultors would pay tax so would buyers. So for all of them the speculative growth potential would be reduced. For end buyers it would cease to be so easy to buy and just hold empty properties, speculatively wating for prices to shoot up.
Any local government that introduced such a tax would loose its competative edge against any other region that set lower taxes or in some other way got around the legislation. So will local governments comply? I think not.
Shanghai government officials already rejected the idea last year as unworkable. Business experts are saying it’s the wrong time to put a tax on property owners- it might hurt growth. Sound familiar to you?
What we have now is an inherently turbulent situation that is being made more unstable because there is no single agenda in control. As fast as one thing is done to reduce bubble inflation other agendas find ways of pumping more.
The situation is illustaed by a little event. A single offical was reported as saying that Beijing was going to delay the property tax for three years. Property stocks across the entire Shanghai exchange jumped. One single comment moves the index. Said offical was wheeled out later to deny he had ever said it.
This is how crashes happen.
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