by Daniel H. Rosen, Peterson Institute for International Economics
Posted in the China Real Time Report, Wall Street Journal
April 23, 2010
© Wall Street Journal
China's economic data for the first quarter of 2010 brought long-simmering worries about overheating to a boil and was quickly followed by tougher-than-expected measures to restrain property speculation from the State Council, the nation's highest government body. The latest measures drove down shares in real estate developers and related companies, and crystallized fears about the aftermath to the strongest stimulus-led recovery in the world.
After a slew of half-hearted attempts to address property prices, Beijing is doing it for real this time. Last week the State Council announced measures including higher minimum down payments for second homes and higher deposits for first home purchases, and this week the first trial of property taxes was reportedly authorized. We are likely at the beginning of a correction in upper-end, first-tier city real estate. There will be some dumping of speculative property, and there could well be a hint of panic in the air over the coming months.
Is a hard landing in China—and thus a negative demand shock for the whole world—going to be the result?
I think the authorities will win the battle for sentiment in the property market, but it will take some months for the nausea to subside. Beijing will pull out all the stops to show that what is taken out of high-end property will be made up at the lower-end real estate. And in terms of overall economic growth, China is looking at a soft-ish landing at worst.
A major reason is that the structure of China's growth is not fragile or prone to a spreading, broader correction. The economic data for March did not show a strong spike, just the same growth that has been on track all along. The composition of growth in gross domestic product in the first quarter was: consumption 52 percent (or 6.2 percentage points of the overall 11.9 percent growth rate), capital formation 57.9 percent (6.9 percentage points of growth), and trade –9.9 percent (which subtracted 1.2 percentage points from growth). Let's consider the outlook for each of these three GDP expenditure components.
Property policies will finally start to detoxify investment growth rates, but this will take time to effect and will not stop most projects in the pipeline. Discipline on frothy residential development in tier one and tier two cities will help to sustain investment at a manageable level and frees up capital for other investment activities—for which there is plenty of demand.
And there is still plenty of credit fueling investment activity in China: After January, when net new lending was as large as the big months of 2009, February and March lending moderated. But if we just look at medium- and long-term lending and leave aside short-term financing against receivables, new credit is not slowing in 2010; it is still increasing. Private investment of money is slowly coming back, as are foreign investors and those from Hong Kong and Taiwan. So investment activity is broadening. Service sector investment is growing at 30 percent, manufacturing at 26 percent.
Consumption is now contributing more to growth than in any annual performance since 1993. Unfortunately, there is no way to tease apart household consumption from government consumption growth on a quarterly basis, so we can't be sure that this is not just a cyclical effort by government to be supportive. But consumer confidence is high and rising, supported by income growth: Disposable income is up 10 percent year on year in urban China, and consumption expenditure is up 11 percent—showing a slight increase in propensity to consume rather than save. Notably, growth in big-ticket autos, household renovation, and furnishings are coming down to earth, while the broader basket of consumer goods from cosmetics to clothing and electronics are stepping up handsomely. A housing correction will not take the wind out of retail sales, in other words.
On the trade side, China ran a trade deficit in March for the first time since April 2004. And Commerce Ministry officials have said that net exports would fall to a mere $100 billion this year (from around $300 billion in 2008 and $200 billion in 2009). However, this is unlikely to actually happen unless the United States and European Union experience a painful double dip this year. If the United States and European Union grow at 4.5 percent and 2 percent respectively this year, then China will move back to a growing trade balance for 2010. The negative trade contribution to growth is already somewhat moderated, and trade will surely contribute much more to China's growth this year than last year.
The bottom line is that a correction in residential property is starting but China is not looking at a pullback in GDP growth to below 8.5 percent this year. This assumes that the trade surplus holds up at around $200 billion, rather than contracting by half as a result of a double dip in the United States and Europe.
Of course, the development that could undermine this point of view is domestic inflation. If consumer price index (CPI) inflation, which came out at 2.4 percent in March, were to resume an upward spiral, that would force additional steps that could easily trigger a more alarming pullback.
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