Choice cuts /
謝國忠谢国忠搜狐证券博客 http://xieguozhong.blog.sohu.com/This article is for South China Morning Post
As growth slows, Beijing must boost efficiency rather than support falling stock and property prices
Updated on Sep 05, 2008
China's
economy is facing unprecedented challenges. An asset bubble bursting at
home and contracting global demand abroad are working together to slow
economic growth. Exports and property have directly contributed to half
the growth in this cycle. These sectors will probably stagnate or even
contract over the next 12 months. Obviously the slowdown will be
significant.
Many businesses, local governments and
pundits are advocating ditching macro tightening (that is, lending more
money) and intervening directly to prop up property and stock prices,
or bail out distressed businesses. But this won't work and would be
destabilising. Despite a 60 per cent decline from the peak, China's
stocks are not undervalued. The problem with property is that prices
are too high for buyers. The solution is lower prices.
Macro
tightening, despite the rhetoric, hasn't been that strong. According to
the central bank, lending by financial institutions increased by 3.1
trillion yuan (HK$3.5 trillion) in the first seven months of this year,
up from 2.9 trillion yuan last year. The nominal gross domestic product
expanded by 20 per cent in the first half of 2008 from last year's
figure and, hence, all else being equal, the debt appetite should be 20
per cent higher.
Further, companies raised 640
billion yuan last year, or 53.4 billion a month, on Hong Kong and
Shanghai markets, compared with 16.8 billion yuan a month so far this
year.
Adjusting for the economic base effect and stock market conditions, incremental funding is 13 per cent tighter this year.
Is
this reduction too much? The GDP deflator - the broadest inflation
gauge - rose 9.6 per cent, and the consumer price index by 7.1 per cent
in the first half of this year. Even by the loosest standards, China is
experiencing broad-based inflation. From labour and food to energy,
inflationary pressure remains intense. Unless financial conditions
tighten, China could experience runaway inflation. So, a 13 per cent
cut in incremental funding may not be sufficient to reverse the
inflationary tide. The 15.5 per cent credit growth rate in the first
seven months of the year, though slower than in previous years, is
still higher than the long-term growth target for nominal GDP. If the
long-term sustainable growth rate for real GDP is 9 per cent, and the
inflation target is 3 per cent, the long-term credit growth rate should
be 12 per cent.
The scope for credit to grow faster
than GDP is limited, as the current ratio of credit to GDP is already
high. Hence, while the current credit growth rate is tight, relative to
the current nominal GDP growth rate of 20 per cent, it is still too
high for long-term stability. For a soft landing, it is desirable to
tighten gradually - that is, cut the credit growth rate gradually.
Chances are, China's credit growth rate will slow for several years.
There is no case for turning on the credit tap.
At
the micro level, as well, a bailout cannot be justified. The problem
with the property sector is plummeting sales due to poor affordability.
Lending more money to developers just gives them more funds to hold
inventory. While it diminishes the pressure on property prices in the
short term, it leads to bigger problems later. High volumes can only be
supported by low prices in the long run. The sustainable property price
is probably 30 per cent to 50 per cent below the current levels.
Preventing a price adjustment only leads to a dysfunctional property
market.
Small and medium-sized enterprises (SMEs)
employ a large proportion of the labour force. Their healthy
development is vital for a good labour market. However, bailouts won't
lead to a healthy SME sector. Healthy businesses must thrive through
competition. China's SMEs depend excessively on price competition for
survival. As China enters an era of inflation and rising costs, this
strategy won't work; enterprises have to adapt, and increase their
technology and quality.
Many SMEs won't be able to
upgrade. Their demise will be a good thing for the economy, creating
room for new entrepreneurs. This is how a market economy handles
change. Government bailouts won't solve the problems.
Also,
when so many earthquake victims are still living in tents, peasants
can't afford to send their children to school and the sick can't afford
hospital bills, how could the government justify spending money on
bailing out failing businesses?
The case for
loosening fiscal policy is stronger. Government-sector revenue could be
twice as high as the prevailing level among developing countries, and
comparable with that among developed welfare states in Europe. However,
China's welfare expenditure is small by international standards. So,
what's the case for such a big government?
Meanwhile,
talk of stimulating consumption will remain just talk; China's
household income is too low for consumption to carry the economy.
Beijing
should commit to shrinking the government-sector revenue to a quarter
of GDP, from about 40 per cent now. It should begin by cutting fees and
taxes. For example, mortgage payments, tuition, health and life
insurance should be tax exempt. Value-added tax, at 17 per cent, and
the 40 per cent top income tax rate are also too high.
China
must boost efficiency, not bail out failing businesses or target asset
prices. Efficiency is the foundation for sustainable prosperity.
Artificially inflating asset prices is like using opium: it delivers
short-term pleasure but causes long-term pain. More opium only
postpones the pain, but makes it worse when it finally arrives.
谢国忠搜狐证券博客 http://xieguozhong.blog.sohu.com/Andy Xie is an independent economist
