Avoiding house debacle in China

13:08, January 06, 2010


By Li Hong, People's Daily Online

At the dawn of a new year when the world has just awakened from a grisly decline of economy and livelihood, all countries, big and small, are hoping for the best that they could leave the nightmarish 2008 and 2009 behind them at the earliest. Foreign economists are talking about green shoots of recovery taking hold on their lawns, while Chinese pundits also predict significant policy changes from Beijing to curb investment bubbles and keep inflation at bay.

In China, the world's major developing economy, though government and consumer confidence has improved, and property and stock markets have surged, the recovery is not ensured at all. As Premier Wen Jiabao has cautioned his cabinet time and again that the comeback from the slump isn't stable yet, and this country must be prepared for a fluctuating performance, and do the utmost to fortify growth.

A smooth running of the economy is subject to Beijng's execution of policies not to the churning seas.
Already, investment bankers and finance professors at the renowned organizations have begun to talk on TV screens that the central bank is expected to raise bank capital reserve ratios in the first six months of 2010, and the bellwether interest rates in the second half year. Some even beat chests claiming that the central government's fiscal stimulus spending comes to an end this year.

But, China's economic fundamentals were fairly impacted, if not throttled, during the gravest financial crisis since World War II -- and perhaps the worst in modern history. The magnitude of the tumble surprises most observers that till today, the U.S. economy, the world's biggest, remains extremely fragile. China's exports to foreign lands, once accounting for more than 40 percent of its GDP growth, dropped to 20 percent in 2009. Now, the spending at home turf by the more affluent Chinese has ratcheted up at little bit, but the skittishness in overseas consumption is limiting revival of exports.

And, the government's urge for the public to "spend more and save less" at the banks is likely to fall on deaf ears, as its effort to phase in a nationwide pensions and medical-care safety regime covering the 800 million strong rural residents, is moving at a snail's pace. For the time being, the whole world is looking to Chinese to spend more, but it won't be attained handily.

So, it is imperative for Beijing to maintain continuity of its policies favoring development, including the massive fiscal stimulus and a comparatively unrestrained monetary policy. As dismal as 2009 was for the American economy, it pales when compared with what would have happened without the fiscal stimulus from the Obama administration and the Federal Reserve's radical monetary boost, including the near-zero interest rates.

It is premature to speculate that China's central bank will soon rein in its monetary policies, which might nip the recovery in the bud. Any drastic policy revisions will inevitably lead to economic tumults, which the country must do whatever to avoid.

That does not mean the central government should keep vigilant and guard against new speculative investment bubbles from forming. Lately, seeing the quick soaring in the price of housing in Chinese cities, the government has re-imposed business tax on selling houses bought for less than five years, to curb property speculation and price gouging. The measure has been welcomed by the public.

However, the government must be careful not to cause a tumble of the equity prices in a short time, because any bursting housing bubble may spark amounting bad loans at the banks, like what has happened in Japan in the early 1990s, and in the United States from 2007 to 2008 which directly led to the current bout of global recession.

That is to say, any policy readjusting in the course of a slow and feeble recovery must be tempered, and carefully choreographed in implementation. A housing debacle on the scale of Japan and the United States must be avoided in China by whatever means.