22 April 2019
China's central bank refused to intervene when commercial banks ran into a credit crunch last year even though it had been widely expected to inject liquidity into the market. Photo: Bloomberg
China's central bank refused to intervene when commercial banks ran into a credit crunch last year even though it had been widely expected to inject liquidity into the market. Photo: Bloomberg

Why Beijing likes to give way to market forces

A major principle held dear by the incumbent Chinese leadership is to let the market play a decisive role in the allocation of social and economic resources.

This principle applies to the design and implementation of property policies, using market-oriented measures to replace administrative fiats in steering the real estate industry, an important driver of the economy, in the past 18 months.

The mindset can be found in the following practice.

First of all, unlike its predecessor, the current leadership has never pledged to keep a lid on property prices. This is a wise move that showed a good understanding of the market.

Officials from the previous administration repeatedly vowed to crack down on property prices whenever these grew too fast but the reality was that the prices often skyrocketed despite these pledges.

Even when administrative rules such as home-purchase bans were imposed, housing prices still rose.

From 2006 to 2012, average residential property prices in China more than doubled. In major cities, prices tripled or quadrupled.

The current administration learned its lesson and refrained from promises to cap property prices. This showed its respect to market forces and that it realizes it would be hard to push down home prices simply with purchase restrictions if supply-demand relationship and economic fundamentals are unchanged.

As for how to deal with rising property prices, the current government adopted a distinctive approach.

It did not roll out any administrative measures specifically targeting the property market. Instead, it focuses on leveraging market forces, especially the money market.

The government has apparently adopted a much tighter monetary policy than its predecessor.

One example was its hardline stance in the middle of last year when the central bank refused to intervene after commercial banks ran into a credit crunch and expected the central bank to massively inject money into the market.

Since then, lenders have become more cautious about mortgage lending and have adjusted their operating strategies to live with tighter liquidity.

With money supply tightened, lenders cut their loans to property buyers and shifted to other higher-return projects, a change that significantly curbed speculative property investment.

The central government also refrained from intervening in decisions by commercial lenders and local governments.

When commercial banks handed out fewer loans to property buyers last year, some called for the central government to step in, but it didn’t.

Similarly, when banks loosened loan requirements recently to attract more homebuyers amid a property slowdown, the government also stayed away.

In addition, when quite a number of local governments scrapped home-purchase limits recently to shore up the property market, central authorities remained silent.

The inaction conveyed an important principle from top policymakers: let the market decide rather than relying on administrative measures.

While giving a full role to the market, the central government did its bit by stepping up construction of less profitable affordable housing, an effort that helped increase fixed-asset investment, improve social equality and boost employment.

This is exactly the duty of a government: do things that are good to the overall social benefit but which market participants won’t do.

Looking ahead, the central government is expected to continue its market-oriented approach. Specifically, greater monetary loosening would be unlikely and the property market would not be included in its “selected” stimulus measures.

Since the central government would be glad to see property prices ease steadily, developers would have to operate in a tight market in the months to come as property-market consolidation deepens.

But affordable housing projects will be supported as a way to offset the slowdown in the overall property market and ensure employment.

The next focus should be the introduction of property tax. Using taxation to steer the market is something the central government is keen to pursue.

It is also likely that home-purchase bans in Beijing, Shanghai and Guangzhou will be ultimately scrapped. The bans, after all, are a legacy of administrative intervention.

But the government will step in to shore up the market if two things – employment and systemic health of the financial market – are at risk.

As long as the job market is stable and the financial system is not exposed to a massive meltdown, the central government will look on with folded arms.

– Contact us at [email protected]


The writer is an economic commentator. He writes mostly on business issues in Greater China.

EJI Weekly Newsletter

Please click here to unsubscribe