Bubbles are not just in residential property markets, but also in other areas. He said:
While the residential bubble is well known, the commercial side has quickly become a bigger bubble. Most cities have commercial space per capita higher than in developed countries. Yet they are building much more. Purchase limits have been imposed on residential properties in recent years. Much of the speculative excesses have been diverted to the commercial side. This is why the building of commercial properties exceeds that of residential properties.The hotel market is a good example. The overbuilding is apparent. The occupancy rate for hotels is low. Most are not making money. Yet so many more are being built. Banks will suffer a huge amount of bad loans in this market.Individual investors have been speculating in retail properties. The average yield in this market has fallen to the same level as in the residential market. With so much more under construction, the rents will only fall further. Widespread bankruptcies in this market are quite likely in the coming years.
Cutting taxes can be a solution:
Cutting taxes by 2 percent of GDP or 1 trillion yuan could stabilize the economy. As overcapacity permeates the economy, the spending from cutting taxes would have a big multiplier effect, possibly over two. Assuming that 70 percent of the tax cuts will be spent, the total stimulus effect could be 1.5 trillion yuan, sufficient to reverse the downward momentum in the economy.
Shifting spending power to the household sector would improve efficiency, too. In the past decade, spending power has been shifting to the government and state-owned enterprises. This is why businesses have been investing in guanxi, not product quality or new technology. The result is that, despite the nominal GDP quadrupling in a decade, few good companies have emerged. If spending power is primarily with the household sector, good companies will naturally emerge from market competition.
Reform is inevitable:
One way to deepen structural reforms is to open the economy further to global competition. Joining the World Trade Organization brought a quantum jump in China’s economic efficiency, as numerous domestic regulations were revamped to conform with the WTO rules. The same could happen now. The bilateral investment treaty with the United States could open many markets not just to foreign capital but also to domestic private enterprises. A free trade agreement with Europe could eliminate most price distortions in the consumption market and help rebalance the economy.
After 1992, Japan did not reform and suffered two decades of stagnation. After the 1998 financial crisis, South Korea reformed quickly and has since become an Organization for Economic Cooperation and Development country. The path China should take is obvious.
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Dr Andy Xie 謝國忠 is Shanghai-based independent economist specialising in China and Asia. He is currently director of Rosetta Stone Advisors and of China Boqi Environmental Science and Technology.
Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.