Not all countries have to follow the monetary policy of the US Federal Reserve, and the development and expectations of their economies need not be synchronized with that of the US. Although many countries’ currencies directly exchange with the US dollar, their business cycles vary. This is not uncommon in history. For example, in 2002, most European countries consolidated their currencies into the euro, and in the ensuing 10 years, the euro has become a popular currency in all European countries, gradually pushing up investment enthusiasm and real estate prices. From the perspective of the wealthy Berlin in Germany, Spain’s assets are certainly inexpensive. This difference in purchasing power can be traced back to the unbalanced Euro convergence criteria (the Maastricht Treaty.) Southern European countries have overvalued the exchange rate of their currency exchange with the euro. This can be seen in the irrational rise in asset prices in these countries after the euro boom, which turned into a speculative trend that eventually created debt risk; European investors went on a debt spree, and eventually, when demand for real estate cooled off, it triggered personal and corporate debt, which affected the financial system and eventually shook the country’s financial stability. In 2012, we saw the start of a sovereign debt crisis in Southern European countries, and the European Central Bank began to implement monetary easing policies to help countries with fragile finances; on June 14, 2014, it lowered the euro interest rate to a negative figure.
All countries’ monetary policies prioritize their respective economic development. In 2015, Beijing leaders began to warn that houses are for living, not for speculation. By early 2017, real estate prices in Beijing, Shanghai, Hangzhou, Hefei, Guangzhou, Nanjing, and Xiamen continued to rise, with an annual growth rate of more than 15%. On February 23 of the same year, the Chinese Ministry of Housing and Urban-Rural Development reiterated the principle of “houses for living, not for speculation”, and in March, the most stringent “demand-side” controls were introduced in 40 provinces and cities across the country, which raised the threshold for purchasing a house, increased the “down payment ratio”, strictly differentiated credit, restricted the price of properties, the number of units for sale, the sales period, and restricted the profit rate of real estate properties. At the 19th National Congress of the Chinese Communist Party (CCP) on October 18, 2017, Xi Jinping reaffirmed that houses are for living, not for speculation. He also re-positioned the real estate sector, callinf for the establishment of diversified supply channels, and then launched a heavy-handed “supply-side reform.” In the 2018, 2020 and 2021 reports on the work of the government by the Chinese State Council, Li Keqiang repeatedly mentioned controlling housing prices and paying attention to financial risks; the Beijing government’s actions during this period showed that the rulers had already realized that the problem is dire, and they were taking a two-pronged approach to curb both supply and demand, and trying to solve the problem of speculation in real estate prices, so as to avoid hurting the financial sector and destabilizing the country’s capital. In fact, the real estate debt risk had surfaced in 2020; in the second half of 2021, the famous Evergrande Group defaulted on its debts, with a debt of at least 2.43 trillion yuan; the Central Committee of the CCP has already made up its mind in 2015 to “hunt down” the real estate speculators.
On October 24, 2021, Jack Ma, the head of Alibaba, announced a new financial concept at the Lujiazui Forum in Shanghai, saying that he would completely get rid of the “pawnshop mentality (providing collaterals for loans)” and replace the old mindset with big data. The Ant Financial Services Company established by Jack Ma has four major payment platforms: insurance, finance, microfinance and merchant services, and their potential users were the more than 1 billion Alipay users. This new innovation of Ant was on the verge of raising funds in the capital market at that time. However, just one day before the listing of A-share and H-share in Shanghai on November 5, Jing Xiantong, Hu Xiaoming and Jack Ma were “invited” by the Chinese Securities Regulatory Commission, State Administration of Foreign Exchange, Banking and Insurance Regulatory Commission and People’s Bank of China (PBoC) for a “coffee”. The following day, the PBoC immediately issued interim measures for the administration of online small amount loan, and the Shanghai and Hong Kong stock exchanges immediately halted Ant’s $35 billion IPO. This incident shows that the CCP is under pressure to monitor major events. As a result, the mid-2016 Economic Work Conference began to suppress real estate development; at the same time, the PBoC also temporarily suspended the relaxation measures it had taken since 2014, and the competent authority of real estate began to impose price and purchase restrictions to suppress housing prices. In the past few decades, especially after the CCP listed real estate as the most important industry to drive economic development in 1998, prices have continued to soar, especially in the coastal areas of Beijing, Shanghai, Guangzhou, and Shenzhen, where housing prices are so high that young people feel powerless; in the midst of the economic slowdown in China due to the European sovereign debt crisis in 2014, the People’s Bank also cut interest rates and benchmarks, and relaxed real estate financing, which led to a significant increase in housing prices in the first- and second-tier cities. As a result, housing prices in first-tier and second-tier cities rose significantly, with the annualized growth rate of housing prices reaching over 26.7% (first-tier) and 11.5% (second-tier) by May 2016. From November 2014 to February 2016, the PBoC stabilized the risk with a number of interest rate cuts and easing policies, and then for the past eight years, it has thoroughly regulated the supply and demand side, finally allowing the real estate war to end and the debt to rise.
The PBoC is expected to continue to relax its monetary policy by lowering interest rates and banks’ reserve ratio, and by 2027 at the latest, the year that Japanese observers call “China’s financial turmoil,” it will be able to make acquisitions of non-performing assets, similar to Freddie Mac and Fannie Mae of the US. At that time, the US was in the midst of a credit crisis, when these two organizations, which were set up by the government, held on to their long-term holdings of MBS real estate bonds and real estate. This is the confidence of American capitalism in assets, which has been successfully implemented in Taiwan in the past. Before the Beijing government took action to suppress the housing market in 2016, the Politburo of the CCP Central Committee, which made collective decisions, had already made preparations for the rescue, that is, the acquisition of equity and non-performing assets by state enterprises, and the comprehensive financial restructuring of defaulting real estate developers.
In the above-mentioned crackdown on the real estate bubble by the Chinese government, it is obvious that the Beijing authorities have taken the initiative to uncover the problem and try their best to eradicate it. The side-effects are the impact on domestic demand, the departure of foreign capital, the sharp rise in the unemployment rate of young people, the drop in prices, and the economy entering into a period of slow recession. In fact, no matter whether it is free capitalism or totalitarian communist dictatorship, every economy will inevitably have a boom cycle. The United States also experienced four recessions after the 1970s: November 1970, March 1975, July 1980 and November 1982. Obviously, each economy cannot avoid the cycle of recession, but the problems of each economy are different. It seems that the Beijing government is trying to cut the risks, especially the political risks, with firewalls!
Dong Jianguo, the Vice Minister of Housing and Urban-Rural Development, said that the Ministry of Housing and Urban-Rural Development will work with financial regulators to address the reasonable financing needs of public and private real estate developers, and that it is committed to preventing the outbreak of a concentrated number of debt defaults. Mainland China’s real estate sector has always operated as a conglomerate, and the fact that a conglomerate is in debt does not mean that the real estate sector has lost its ability to operate, and financial regulators have a series of supportive policies in place to allow the market to prevail in accordance with the rule of law. On January 5, 2024, Zhongzhi Enterprise Group, a company that started out in Heilongjiang, filed for bankruptcy and liquidation in the Beijing First Intermediate Court because of the failure of the company to pay off its RMB420 billion to RMB460 billion in liabilities with its RMB200 billion of assets. Whether this will jeopardize the stability of the entire financial sector and create a domino effect is worth observing over the Lunar New Year’s Day (February 8, 2024).
(Chiu Chi-chang, Associate Professor, Department of Statistics, Tamkang University)
(Translated to English by Chen Cheng-Yi)
