Author：Fubing Su Ran Tao
Date：2011-01-07
Summary：
The burst of housing bubbles in 2008 triggered the worst economic crisis in the United States since the great depression. Financial globalization has exacerbated the contagion and a worldwide recession soon followed. As one major trading country, China depended heavily on export markets in the United States and Europe therefore its economy experienced serious setbacks. After the double digit growth in 2007, the Chinese real estate market started to take a nose dive. In the first quarter of 2008, the average house price in 70 major cities grew 11% but by the fourth quarter the growth rate slowed down to only 0.5%. The first quarter of 2009 even saw a growth rate of -1.1%. For the first time since 2000, house prices in China actually dropped. The parallel between these two countries, however, stopped there. While the American housing market continued to be sluggish after a steep decline, the housing market in China rebounded in a very dramatic fashion. After two consecutive quarters of negative growth, house prices began to rise again in the third quarter of 2009 and double digit growth reappeared by the first half of 2010. In April 2010, for example, the average house price grew by 12.8%, the fastest rise since 2000! The national average actually understated the extent of price hikes and some hottest real estate markets registered even more impressive figures, e.g. Shenzhen (18%), Hangzhou (17%), Wenzhou (22%), Haikou (53%), and Sanya (52%). Land was a mirror image of the housing sector. After the record high of 16.5% in the first quarter of 2008, the growth rate of land price plunged to only 1.5% in the first quarter of 2009 before climbing up to a new record of 21.2% one year later.
This “V” shaped recovery has certainly benefited from the stimulus package introduced in the fall of 2008. To avert a severe economic slowdown, the government pledged to increase fiscal spending by 4 trillion yuan in two years. In addition, the central bank also loosened credit policy and, as a result, about 10 trillion extra loans were issued in 2009 and another 4.6 trillion in the first half of 2010. With this extra fluidity, real estate prices should be expected to go up. While certainly valid, the power of this explanation should not be overrated. China‟s stock market, another sector that tends to rise with inflationary expectation, is still about a third of its peak in 2007. Something about the real estate sector must have attracted investors. Close examination of
this recovery episode does raise some interesting questions. There is no doubt that the central government intended to raise real estate prices and believed that the stimulus should stabilize the market. By the fourth quarter of 2009, top officials acknowledged that the real estate market was apparently over-stimulated and price increases were on the verge of exceeding the pre-crisis levels, which were definitely not stable or sustainable. The central government quickly stepped the brake and reversed the course. Starting from December 2009, a series of tough measures were adopted to rein in the runaway prices, including no business tax exemption on house transactions within five years (instead of two previously) of purchase, 50% of land lease fees upfront and full payment within a year for developers, 40% down payment for second-home buyers, 70% of residential land supplies for affordable housing, and forced withdrawal of 78 large state companies from real estate businesses. House and land prices continued to climb in the first quarter of 2010. In desperation, the central government tightened the noose further by requiring 50% down payment for second-home buyers and stopping loans to third-home buyers all together in some cities. In addition, provincial governors were held personally responsible for price controls in their jurisdictions. In the following two months (May and June), house prices kept rising in double digits. Signs of slowing down finally emerged in the market but rumors about possible termination of price controls were already being spread in the media, which made the future direction of the market still uncertain.
Why did the central stimulus policy accomplish its goal almost immediately and even over-stimulate the market? Why, on the other hand, did its price stabilization policy fail to achieve the target several months after the initiation? This paper argues that, to understand this asymmetry in policy effectiveness, we need to analyze the incentive structure of the central and local governments in China. Massive industrialization and urbanization in the past few decades have turned real estate businesses into a major pillar of the Chinese economy. The Central government, local governments, banks, and real estate developers have forged a coalition and shared the common interest in keeping the sector growing. Local governments, in particular, are heavily indebted to this sector for GDP growth, job opportunities, and most importantly fiscal revenues to finance government functions. Land lease fees and taxes directly from real estate businesses have contributed handsomely to local coffers. The central government, on the other hand, does not collect a lot of revenues from this sector directly. Therefore local governments have stronger
financial incentive than the center to engineer an ever-expanding real estate industry. When the center green-lighted economic stimulation, local governments rushed to implement the central policies to the fullest extent. Many regions even improvised local rules to provide further stimulation. The center‟s price control measures, on the other hand, went against local governments‟ financial incentive. Local officials dragged their feet drafting local implementation plans and some even actively sabotaged the central policies. As a result, local governments have become amplifiers or dampers of the center depending on their interest alignment with the latter.
This analysis has a few theoretical and policy implications. China‟s central-local relations have been the subject of intensive debates among political economists (Goodman and Segal, 1994; Huang, 1996; Yang and Naughton, 2004; Li, 1998; Wong, 2009). While some scholars believe that local governments have acquired enough power to bypass central control, others argue that the central government has adapted to new conditions and regained an upper hand. Our analysis of the real estate stimulus policy in 2008-2010 suggests that extreme views on both sides oversimplify the reality. Totally runaway local governments cannot be tolerated in an authoritarian state but local officials have indeed secured some autonomy. The central-local relation is like that of the wrist and fingers. The center may keep a tight wrist to control the general direction but, like fingers, local governments can still maintain certain wiggle room. In a large and centralized country, this equilibrium is hard to break because the central government must rely on its agents, i.e. local governments, to collect information and implement policies (Su, 2002). What kind of information is being passed upward and how policy is being selectively implemented will determine the content as well as the final impact of public policies. Instead of one side controlling the other, this mutual accommodation and negotiation are likely to persist in China‟s central-local relations.
Earlier scholarship has paid ample attention to the financial motivation of local governments in driving China‟s economic growth (Blanchard and Shleifer, 2001; Oi, 1993: Montinola, Qian, and Weingast, 1995; Jin, Qian, and Weingast, 2005). This paper amends this literature in two folds. First, these scholars have focused too narrowly on budgetary incomes of local governments. For the most part of 1980s, it was extra-budgetary revenues that gave local officials the incentive to promote growth. State and collective ownership provided institutional support for the expansion
of the extra-budgetary account. Second, this narrow focus cannot explain local officials‟ strong urge for growth after the fiscal recentralization in 1994. We argue that changes in the central-local fiscal arrangement and the state-business relation in the early 1990s limited the ability of local governments to collect incomes. To keep up with their rising expenditures, local governments turned to land and real estate development for revenues. Taking advantage of the de facto monopoly of land supply in their jurisdictions, local governments leased land cheaply to manufacturers while demanded high prices from real estate developers. Through “managing” land and urban development, local governments have maximized not only land lease fees but also formal tax revenues. In short, our analysis of local governments‟ financial incentive transcends the narrow focus of the earlier literature and provides a logical explanation of local officials‟ behavior both before 1994 and in recent years.
These two theoretical angles have direct policy implications for the development of a healthy real estate sector in China. For obvious reasons, the Chinese government has frequently intervened in the land and housing markets. While scholars and policy makers have been debating the merit of the “visible hand”, the biggest problem in China is that the “visible hand” constantly fights itself. The wrist and fingers are not always working in the same direction. This indecisiveness creates more uncertainty in the market and encourages speculation. To boost the market‟s long-term health, the government may need to refrain from too much and too eager intervention and let the “invisible hand” do its trick of stabilizing the market expectation. To make this possible, local governments‟ heavy dependence on revenues from real estate businesses must be adjusted. They should no longer be the only suppliers of land in the local markets. Collectives or individuals should be given the power to transact land on their own. As discussed fully in the conclusion, some financial instruments also need to be introduced so local governments‟ financial interest is guaranteed.
The rest of the paper proceeds as follows. In section 2, we explain the root of local governments‟ financial interest in land and housing development. To do so, we critically survey one popular literature about local developmentalism and propose our alternative perspective. The following section focuses on land and real estate development and traces their different impacts on central and local finances. Then, we illustrate this central-local divergence logic with a case study of the
stimulus policy between 2008 and 2010. The final part concludes with some discussions about possible reforms in the future.
Keywords：Real Estate Markets
