What Beijing should bear in mind ahead of CPC plenum

October 24, 2015 08:04
China must watch out for fresh housing bubbles as it eases monetary policy to revive growth. Photo: Reuters

The 18th CPC Central Committee will hold its fifth plenary Session at the end of this month. The meeting is likely to cut the economic growth target to 6.5 percent for the 13th Five-Pear Plan period from 7 percent in the previous five years.

The central government will continue to relax controls over the property sector in the short term.

But the leaders should bear in mind that if the housing sector fails to phase out excessive capacity, the problem may become even more serious. Some regions in Shenzhen have already seen stronger housing prices than Hong Kong.

Housing prices in Shenzhen have surged 30 percent between August and September in some cases, partly because investors were switching back to hard assets following the stock market meltdown.

Property is now being seen by some as a safe-haven asset class, raising the risk of another bubble. While it can be said that Shenzhen's housing market is underpinned by robust demand, the situation in other Chinese cities is not the same, and we can already see signs of a bubble building up.

First-tier cities may continue to see a rise in property prices, while some second-tier cities might see modest declines. But third-tier cities are less lucky.

The overall picture is that the US will kick off a rate hike cycle for the next two to three years, while China will be in a rate cut cycle.

That could mean even larger housing bubbles.

Meanwhile, the narrowing gap in interest rates between US and China will exert more pressure on the Chinese yuan.

Capital outflow could gather momentum against such backdrop. As much as US$140 billion has fled out of the country in August alone. There is a possibility that the nation could see a capital outflow of as much as US$1.7 trillion for the whole year, which is equivalent to 15 percent of China’s GDP.

The renminbi could face considerable depreciation pressure if Beijing fails to stem the economic slide. In such case, the currency could lose 10 or 15 percent in the next three years, or weaken by 4 to 5 percent per year.

As China seeks to transform its economy from a manufacturing-driven model to one that is consumption-led, the size and quality of the population will determine the overall growth prospects. And population quality will also determine the development of R&D and innovation industry.

Hong Kong’s economic success before the 1997 handover has been established on "borrowed land and time". The US, meanwhile, has achieved its economic growth through "borrowed money and talents".

If China can overhaul its intellectual property rights protection system and create suitable environment for entrepreneurs and scientists to flourish, it can forge ahead in its development path.

Overall, success of Beijing's reform efforts and realization of the "China Dream" will hinge on whether authorities can restore public trust in the government and in the nation’s future.

This article appeared in the Hong Kong Economic Journal on Oct. 20.

Translation by Julie Zhu

[Chinese version中文版]

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adjunct professor in the Department of Finance at HKUST Business School