Analysing property market to view China's economy
(Business Weekly)
Updated: 2005-06-13 11:26

Currently, having an accurate picture of China's macro-economic situation is an issue in which both government and society are greatly interested.

On the one hand, the growth rate of banking loans slowed down and M2 climbed in April, indicate statistics released by the People's Bank of China.

The statistics also indicate the growth rate of bank loans in the year's first four months was 9.87 per cent, much lower than the 22.13 per cent registered in the same period of last year. The growth rate of the consumer price index (CPI) also slowed in the first quarter. All are indicators China's economy is slowing down.

Now, let's look at the other side of the picture.

The growth rate of gross domestic product (GDP) maintained the high speed of 9.5 per cent in the first quarter of this year, and domestic fixed investment increased briskly.

The real estate market, an industry the central government has tried to rein in since last year, still shows no sign of cooling down. The average sales price of commercial housing in China soared 12.5 per cent, year-on-year, in the first four months of this year.

If judged on these two factors, it indicates China's economy is still in high gear. Then what is the real state of China's economy?

In recent years, government, research institutes and academics have been confined by their outdated mindset when assessing China's economic situation. Rather than diagnosing the problem by looking at real economic life, they have tended to diagnose the economy through traditional theories and seemingly reliable data.

As a result, they have always reached far-fetched conclusions.

For example, there were emerging signs, since the second half of 2003, that the economy was overheating. But the mainstream view then was the economy was still on a healthy track, and there was no need for government to step in.

Only in January 2004, when domestic investment surged 53 per cent, did they realize the economy was overheating and the government would have to implement macro-economic controls. The government used administrative measures, mainly the tightening of credit and land controls.

The government's decision to introduce macro control measures was right, but using administrative measures to do so achieved short-term results, but failed to have long-term effectiveness.

More importantly, the government's failure to realize the housing market was the source of the then-overheated economy, and the government's failure to use the housing price as the barometer to guide its macro control measures made it hard to restrain the high-speed growth of domestic investment. That argument has been proven to be true.

China's economic development since then indicates the effectiveness of the macro-economic controls is not noteworthy. Prices in the overheated sectors such as steel and building materials are rebounding and investment and speculation in the property market are red hot. As a result, housing prices are soaring.

China's policy-makers tend to judge the macro-economic situation by observing growth of credit and money supply, an approach that is too narrow and too likely to result in a distorted conclusion.

By using this questionable approach, policy-makers are likely to misjudge the state of the macro-economic situation and monetary policy.

According to this method, China's current monetary policy can be called tight.

Many central banks in developed countries judge the state of their economies by observing recent changes in the monetary condition index; for example, by assessing the relationship between real GDP and the real interest rate, and/or the total money supply and the real effective exchange rate.

Some central banks also set the housing price index as an important reference when setting their macro control policies.

The Chinese economy is in a transition period. It is facing many complexities and uncertainties. This demands an innovative approach to touch the real pulse of its economy.

The only way to have a real picture of China's current economic situation is to carefully observe the housing industry.

The real estate industry has gradually developed into a pillar industry supporting China's economy since 1998, when housing reform was launched. The booming property market has unleashed huge domestic demand and stimulated the development of 40-plus related sectors including steel, cement and building materials.

It is estimated 25 per cent of the steel, 70 per cent of the cement and 25 per cent of the plastic products in China are consumed by the property industry.

Between January and March of this year, investments in 14 provinces' housing industries soared more than 30 per cent.

In the same period, the growth rate in the sales volume of housing rose more than 30 per cent in 14 provinces or municipalities.

Those figures not only indicate the housing industry is the source of the current round of economic overheating, but also reveal the housing fervour is spreading from China's coastal areas to inland regions, and is resulting in an nationwide housing-investment boom.

And the fact the growth rate of housing sales volume exceeds housing investment indicates, to some extent, housing prices are surging. The rapidly surging housing prices will certainly result in huge profits, and, in turn, attract more investors.

The brisk development of the housing market will spur overheating in other industries. And, according to statistics released by the central bank, the increased medium- and long-term bank loans account for 47.7 per cent of the total issued bank loans in

Therefore, it can be said the high-speed growth of investments in the housing industry is the result of a loose monetary policy.

In summation, only by properly analysing the housing market can we view, with reasonable accuracy, China's economy.

Close