Riding the Tiger Balloon

More than half a century ago, China’s first communist tyrant Mao Zedong said capitalism is nothing but a paper tiger. As visionary as he considered himself to be, the self-deifying dictator could never have thought his successors would ride on a balloon tiger, one that the regime has created and blown up so large that it will burst from the lightest poke. The tiger balloon is officially known as China’s real estate market.

While Chinese communist leaders are loudly celebrating their success in maintaining an 8 percent GDP growth rate, many economists around the world are unanimously predicting that the bubble will burst in 2010. No doubt, the disaster will start from the crash of the housing bubble. The root cause of the coming economic catastrophe is, apparently, the greed of the Chinese communist regime.

The Bubble

It is no secret that China’s housing bubble has reached a tipping point. Published data alone is enough to reveal imminent danger. Housing prices in China's 70 large and medium-sized cities rose 7.8 percent in December 2009 from the previous year, the fastest increase in 12 months, according to China’s National Bureau of Statistics. In major cities such as Beijing and Shenzhen, the price-rent ratio in 2009 was typically around 1:500, with 1:700 in some regions, representing a 25 percent increase from 2008, and far exceeding the internationally accepted reasonable range of 1:200 to 1:300.

Most Chinese find their income growth rate lagging far behind the pace of the soaring price of housing. The ratio of annual income to the cost of housing in China has reached 1:20, compared to the safety level of 1:6. A report issued by the Chinese Academy of Social Sciences pointed out that 85 percent of Chinese families can’t afford to buy a home.

State-Owned Enterprises as the Bubble Blowers

The rising price of land is a major cause for the increase in the price of housing. For example, in Shanghai in 2009, the cost of land was, on average, 46.7 percent of the housing price.

Strangely, while the purchasing power of families was shrinking, that of the land buyers, the majority of which are state-owned enterprises, was lavishing relentlessly. The year 2009 spawned many “land kings,” companies that won land biddings with astoundingly high offerings. At least half of these land kings are affiliated with the central government.

As a matter of fact, among the 129 state-owned companies, over 70 percent are involved in real estate, though only 16 are based primarily in the property industry. Chinese official media also admit that the colossal state-owned-enterprise cash has pumped up the price of housing.

The land purchases are mostly speculative investments. Frequently, the buyers leave the land idle while waiting for the price to shoot up further. Hoarding has been so prevalent that the Chinese government has started to apply rigid rules to curb such behavior. In a contract on a US$3.7 billion land deal published in January this year, the government required that the buyer finish all construction work on the purchased land by the end of 2016, and stipulated that each extra day would cost the company one percent of the total land cost, and that the land would be confiscated without compensation if left idle for two years.

Government as the Real Bubble Blower

The obvious question is: Don’t these companies see the risk of investing in a bubble market? Well, they do. Wang Shi, Chairman of China’s largest residential real estate developer Vanke, told his former classmates in an EMBA (Executive MBA) reunion in 2009, “China’s real estate market has been a bubble market now, and the bubble will burst. Vanke is ready for that.”

Then why keep investing now? A new real estate developer, Mr. Zhang (who obtained a 40 percent net profit from his first deal), gave us the answer: “The housing price will not drop significantly,” Zhang said, “because land-sale revenue is the primary income source of local governments. Especially during the financial crisis, the government won’t allow the price to go down and thus hurt themselves.”

Developers also know that Beijing would not tolerate any major loss in the real estate sector because it is now the real pillar of China’s financial system and the primary hope for realizing Beijing’s goal in maintaining the GDP growth rate of 8 percent. For the developers, the logic is extremely simple and strong: if the central government doesn’t allow housing prices to go down, they won’t go down.

And they have good reason to believe so. Under the high GDP growth pressure from Beijing during the dark days of global financial crisis, local governments have no other way to gain quick money but to sell land. The 4 trillion yuan (US$570 billion) stimulus money has therefore flown largely to the real estate market, which only blew the bubble up some more.

As a result, in 2009 the land sale revenue of local governments reached 1.59 trillion yuan ($233 billion), representing more than a 60 percent increase from 2008, according to Chinese mouthpiece Xinhua.com.

“In all regions, real estate is the primary driver of local economic growth,” observed Song Liang, analyst of the Distribution Production Promotion Center. “The local governments have tied their own benefits tightly to the real estate business.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.