Page 2 of
2 China
reformers battle property inflation
addicts By Peter
Lee
Traditionally, SMEs have been starved
of capital, as the big banks hesitated to lend to
unfamiliar entities and instead handed out money
to their old friends in SOEs and local
governments. Informal financing entities have
stepped in to fill the gap. When local informal
finance came unglued in Wenzhou, an
entrepreneurial hot spot, the State Council, or
cabinet, announced the creation of a Wenzhou
"pilot zone" in which informal finance would be,
well, formalized, legalized, and regulated,
hopefully creating a reliable recourse for smaller
enterprises in need of credit and capital. [3]
Recently, the China Bank Regulatory
Commission (CBRC) opened the door to 100% private
ownership of rural and township
banks (a state-owned bank
has to be present at the creation with a 15%
stake, a figure that itself had recently been
reduced from 20%). [4]
The central
government is also encouraging banks to compete
for deposits by giving them more leeway to offer
more attractive deposit rates than their
competitors and loan this money out to secure,
virtuous projects. [5]
This interest rate
reform is also seen as a key step in enabling
privately funded banks to differentiate themselves
from state-owned commercial banks and also enforce
some market discipline (if the banks offer higher
interest rates, they would have to manage their
loan portfolios more carefully and professionally
in order to maintain an acceptable margin. That's
the theory, anyway.)
However, it is a
difficult task given that China's bank regulators,
perhaps understandably nervous about the sudden
appearance of hundreds if not thousands of dubious
banks and perhaps not unwilling to hobble
challengers to their traditional bank
constituency, has required that the new banks have
existing commercial banks - their competitors - as
start-up investors. [6]
The government is
also working to reduce the SOEs' shadow over the
economy by making it easier for private investors
to belly up to the SOE trough and share in the
excess profits the SOEs enjoy as a result of their
privileged access to credit, regulatory and
approval facilities, and opportunities. From
Caixin:
[T]he State Council has required
central government agencies to map out
implementation rules to encourage private
investment. Reform priorities were given to
seven sectors: railway, urban construction,
financial industry, energy, telecommunications,
education and medical care.
[7]
There's also the hope that
"reform", that is opening up utilities to private
investment, will provide that elusive win-win as
quality investment opportunities increase,
efficiencies of poorly run utilities improve under
market discipline, and infrastructure can be
upgraded through more efficient, less costly , and
less inflationary investment.
The
government has declared its commitment to guiding
private investment to improve China's abysmal
water quality and civic facilities, while offering
investors access to the guaranteed market offered
by city dwellers:
The government will
"implement supportive price policies for public
utilities, such as urban water and gas supply and
heating, low-income housing, railway and medical
care, to fully mobilize the initiative of private
capital entering those areas," the National
Development and Reform Commission said in a
statement. [8]
The cornerstone of the
reformers' near term policy - and answer to the
economic conundrum of how to stimulate the economy
while starving the real estate sector - is
something that could be characterized as
"selective stimulus", ie trying to preferentially
direct policy and credit away from the traditional
real estate and SOE channels into new initiatives
that will not only help the economy rebound, but
also support its restructuring through the
emergence of new, more efficient, and private
investor-friendly sectors.
Selective
stimulus is evident in China's announcement of its
investment priorities, as Xinhua reported:
On May 30, the State Council, or
China's cabinet, adopted a plan to boost the
development of seven strategic emerging
industries amid the country's economic slowdown.
According to the plan, the strategic
industries include energy-saving and
environmental protection, information
technology, biology, advanced equipment
manufacturing, new energy, new materials and
new-energy vehicles. A lot of investment will be
put into these industries.
These new
industries are key to China's economic
restructure. They will contribute to solving a
variety of problems such as low added-value in
exported products, huge energy consumption,
serious environmental pollution and labor
shortages. Private investment also must play a
role. ...
The government also pinned
much of its hopes on consumption and demand
growth, another major source for economic
development. The coverage of a nationwide
medical insurance and social security network is
expected to help release the huge consumption
potential among Chinese people. [9]
In
other words, the government is selectively
releasing the purse strings to encourage (to be
unkind) overinvestment in nice things like
hospitals and windmills instead of overinvestment
in high-end flats and steel mills.
The
government has also sought to sidestep the
inflationary, speculative element in real estate
construction while preserving its stimulative
effect by embarking on a massive campaign to build
36 million units of low-income housing over the
next decade. One has the impression that the
object of this solicitude is China's construction
material, white goods, and housewares suppliers as
much as the deserving poor. [10]
Not
macro, but too big to call micro, the reformists
in the PRC government are working on a
multiplicity of fronts to leverage its control of
regulatory, price, and financial market mechanisms
to establish an improved paradigm of a planned
economy, and use private investor greed and
activism to create an alternative to the
traditional model of the center throwing money
into the bottomless pit of infrastructure and real
estate construction, either directly or through
the state-owned banks.
It's rather
interesting that, as in the United States, a
conservative, entrenched elite is in favor of a
consequences-be-damned form of laissez faire,
while liberal political and economic reformers are
trying to transform the economy through government
regulation, financial restructuring, and
industrial policy.
Right now, the
constellation of reformers around Wen seems to be
having better luck than President Barack Obama and
his team.
The question is whether these
initiatives will survive their internal flaws and
contradictions, amplified by concerted opposition
in the midst of a brutal economic downturn.
China's reform effort may succeed - or be derailed
by the collision between a vulnerable economic and
political system and the worsening global economy.
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