Caixin Online: The last chance of survival in China: Andy Xie

March 25, 2013

BEIJING (Caixin Online) — The 20% capital gains tax is the latest half-measure in the government’s attempt to stabilize, rather than burst, the property bubble. If the measure deflates the bubble, new measures may appear to revive speculation, as occurred in 2008 and 2012.

Managing rather than rooting out speculation is a dangerous game. The prolonged bubble will eventually bring a bill large enough to sink the banking system.

China’s economy has become dependent on the bubble to turn bank loans and gray income into government revenue. If the bubble pops, the government will be destabilized. If the bubble remains, society is destabilized. The country must choose.

Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs.
The bubble is a form of leverage, i.e., borrowing from the future, in achieving growth. Lending new money for repayment is another. Unsafe food and polluted water and air are also manifestations of not paying the full price for growth.

China is stretching its society to the limits for the sake of sustaining growth, all in the name of social stability. But, China suffers a labor shortage and inflation. Growth under the existing model exacerbates both. How could such growth be good for social stability?

The labor shortage provides a good background for restructuring the economy. The country’s position as the factory of the world is still solid. Hence, any slowdown from restructuring the economy would be limited and would not lead to destabilizing high levels of unemployment. The resulting low inflation would enhance social stability.

China is stretching its society to the limits for the sake of sustaining growth, all in the name of social stability. But, China suffers a labor shortage and inflation. Growth under the existing model exacerbates both. How could such growth be good for social stability?


If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for -survival, not a choice.

Cooking the bubble

Inflation within and currency appreciation without are the macro combination ideal for cooking a big bubble. Japan had it in the 1980s, Southeast Asia in the 1990s. China has had the same since 2005.

The East Asian development model is based on manufacturing exports. When currency appreciation pressure materializes, there is political resistance. The resistance leads to rapid monetary growth and inflation at home, and persistent expectations for currency appreciation abroad.

The environment sucks a disproportionate share of monetary growth into the property market, which delays the inflationary impact and justifies its continuation.

China’s currency appreciation pressure began in 2004. When it became a political issue in the Sino-U.S. relationship, it supported the expectation of a one-way bet on the yuan, triggering massive hot money inflation. China’s broad money supply has quadrupled since.

Most of the monetary growth has gone into the property market, which in turn becomes government revenue. Like everywhere else, China’s property bubble is a monetary phenomenon.

Recooking the bubble

When the global financial crisis broke out in 2008, speculative fervor froze in China. The live pictures of speculators crashing and burning in the United States and Europe frightened away China’s. China’s economy tanked on both falling exports and a crumbling bubble.

The 2008 stimulus was justified because it supported employment. Its practical outcome was to revive speculation, subsidized by loose bank lending. It emboldened China’s speculators to think that even if bubbles were popping everywhere else, China could go it alone. That psychology has given the government extra room to manage growth in the short term, but its long-term consequences are severe.

China’s dirty air clears a path for new investments

To avoid more damage to the environment, the central government is willing to compromise less industrial growth for a more ‘Beautiful China.’ in order.

The bubble recooking occurred again last year. When the market froze in the middle of last year, state-owned enterprises used borrowed money to bid up land prices, manufacturing an upward price curve. Its psychological impact eventually convinced speculators to play again. Banks’ loosening lending standards helped the revival.

Prolonging the bubble

The government has introduced tightening measures against property speculation from time to time. These measures have never been serious enough to stamp out speculation. They merely slowed and extended it.

The ineffectiveness of the measures keeps up the dream that prices could surge when the government either loosens up or is overwhelmed. That dream keeps speculators in the game.

The latest measure — a 20% capital gains tax, yet to be fleshed out in detail — is the latest example. In the short term, it sparked a frenzy because speculators are rushing to buy before the tax comes into effect. But this revival in speculation is a bounce in a long-term bear market.

Without government intervention it would burn out soon. But government action will convince speculators that any cooling in the market is due to government action, i.e., the market could go much higher otherwise, not a fundamental change in the macro environment. It keeps speculators’ hopes alive. They won’t leave the game.

Again, the unfulfilled desire creates some policy room to improve the economy in the short term. When the government removes some of the tightening measures, the speculators will come back.


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