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Addiction to real estate
State-owned enterprises (SOEs) are obsessed with real estate because they earn huge profits from the sector. But if the real estate balloon bursts it will cause irreparable damage to the national economy, says an article in the Economic Observer. Excerpts:
More than 70 percent of 134 SOEs earn nearly a third of their revenues from the real estate market. This, combined with their poor ability to adjust to changing markets, would land them in big trouble if the real estate market balloon bursts. One example of the SOEs’ ability to adjust is their floating loss of 11.4 billion yuan ($1.67 billion) on an investment of 125 billion yuan ($18.3 billion) in financial derivatives.
SOEs have the unique advantage of evading risks behind government policies, and they can shift their losses to the national treasury. But if they, as the mainstay of China’s economy, set aside a huge part of the resources from their core business to drive up housing prices, then they are seeking to make profit from borrowed prosperity. In other words, they are preparing to commit suicide.
As Harvard economist Michael Jensen said in his free cash flow hypothesis, most SOEs actually reinvest their dividends from the housing market to buy new land. If this continues, we could soon see the pillars of the national economy change into financial derivative investors.
Their addiction to the opium of real estate can be cured only if their access to State funding is made difficult.
A case for yuan revaluation
Proper revaluation of the yuan will not only relieve pressure from the US, but also help China avoid inflation, says an editorial in the Shanghai Business Post. Excerpts:
In the US, 130 senators are lobbying the government to put China on the list of exchange rate manipulators, which is tantamount to declaring a trade war. China can fight back by dumping its US Treasury bond holdings but that would cause unimaginable damage to its economy, too.
The US senators are politicizing the issue by saying that the yuan is under-valued. But the US government is unlikely to agree to their proposal because of the interdependence of the two economies, though its stagnant domestic economy and high unemployment rate will continue to haunt American trade pundits for a while.
In such a situation, a proper revaluation is mutually beneficial for both the sides. A revaluated yuan can ease China’s tension over inflation, caused by the government’s massive economic stimulus package. The yuan’s value has to be increased and interest and exchange rate have to be boosted to keep China’s inflation rate below 3 percent.
Greater flexibility in the exchange rate is crucial to reforming China’s industrial structure in order to raise efficiency and production values.
