Xie Guozhong: Pressure On Property Market To Curb Bubbles

The latest statistics, though far from accurate, have unequivocally shown that China's economy is overheating and speculative bubbles: GDP growth reaches two digits; official property prices are growing at a two digit rate (if they increase or exceed 50% according to the real estate industry's own data); real estate investment has increased by 1/3; inflation is likely to catch up with two figures, though inflation is still low in official statistics.

In order to avoid a major crisis, decisive policy actions must be carried out.

In fact, some crises may be inevitable.

If there is any delay in policy, once the crisis happens, the consequences will be more severe.

The real estate bubble has expanded dramatically.

As soon as the two sessions ended, the wind of speculation increased immediately.

In major markets such as Beijing and Shanghai, property prices and volume have surged.

Speculators have become scary, and depositors are in panic because of inflation.

No one believes that the government will let property prices fall.

As a result, people have put aside their savings and borrowed as much money as possible to buy houses, even without price.

All this is similar to the last frenzy of financial frenzy.

If the lessons of other countries can be used for reference, this madness will quickly blow up the bubble, and the consequences may be disastrous. 20 years ago in Japan, 10 years ago in Southeast Asia, now the United States is clear.

The latest government measures to curb speculation are still technical in nature, aiming only at speculative demand.

However, similar measures that have been introduced in the past can be circumvented.

In fact, the real driving force behind the big bubble is long-term negative real interest rates, that is, nominal interest rates are lower than inflation rates.

Unless this is corrected, the bubble will come back and become bigger after a short period of time.

And this vicious cycle will come to an end, only if banks do not have enough liquidity, that is, residents will no longer increase their savings, but borrow as much as possible.

In fact, recent data show that this is coming.

The most effective measures to control bubbles are: first, raise interest rates until the inflation rate is higher than expected; two, raise capital requirements of banks.

China should raise interest rates by 2 percentage points as soon as possible, and the current interest rate is ridiculously low.

Such a negative interest rate is too long, it will lead to the real estate bubble, the allocation of resources is not appropriate, and ultimately lead to the financial crisis.

China's current interest rate may be 5 percentage points lower than the normal level.

The appreciation of RMB is expected to provide a substitute for interest rate for capital holders.

In fact, this appreciation anticipates the demand for RMB, which has resulted in a 3 fold increase in China's foreign exchange reserves over the past five years to 2 trillion and 400 billion US dollars.

During that period, China's asset prices also rose by about the same magnitude.

Inflation also followed.

Through inflation (though statistics say China has not yet inflation), China's currency may actually have appreciated.

The evidence is: first, exporters are seeking to pfer more production to other countries. Second, compared with international comparison, China's price level has been very high.

Many expectations of today's currency appreciation may be a bubble.

This expectation is still strong, just because hot money thinks China's asset prices will still rise.

The most effective way to deal with this expectation is to cool domestic asset bubbles.

Therefore, raising interest rates may drive away some hot money.

By raising interest rates, China can avoid some small policy moves.

Monetary tightening is actually very late now.

If the first tightening action is crunch, it may leave people with the impression that the government is not determined enough, and even worse.

China must raise its core capital adequacy requirements for the banking system as much as possible, because these banks support capital expansion by raising capital.

Without doing so, as these banks are motivated to expand at the fastest pace, loans may rise again.

The demand for RMB appreciation ensures that banks have enough liquidity.

The current loan to deposit ratio is 67%, and banks still have enough room to lend.

Additional capital injection will increase the pressure on further lending, because the return on equity will decline if lending is not made, which is unfavorable to the remuneration of senior executives of banks.

Taking into account the above factors, the government should raise the core capital adequacy ratio from 5% to 8%, so that banks can meet the target within three years.

It is not difficult to achieve this goal.

High core capital adequacy ratios only provide a cushion for taxpayers, and Chinese banks are too big to fail.

On the day of the bursting of the property bubble, the government must inject capital into the bank, which comes from taxpayers.

The last property bubble burst in 1998, when the ratio of bad loans to total loans reached 40%.

If the current bubble burst, the bad loan rate could reach 20% or more.

The current capital base of banks is far from enough to cover losses caused by non-performing loans.

Banks should increase capital as soon as possible.

This pressure will reduce their lending ability and slow down the bubble expansion.

By limiting the size of the bubble, banks will suffer less when the bubble burst.

Everyone should learn from the lessons of the United States.

Bubbles should not be ignored, because eventually it will pay a heavy price for taxpayers.

It was only after the bubble burst that action was taken, just like Greenspan, the former Federal Reserve Chairman, who was totally irresponsible.

China must take major actions to prevent disaster.

Failure to do this is irresponsible.