A survey of common views on China’s economy in early 2014

Since the start of 2014, China’s economic situation and its prospects has been much discussed and debated in the Chinese-language media. Three factors have contributed to this focus on the economy: Xi Jinping’s strong leadership style and rapid centralisation of power since assuming the role of Party General Secretary in November 2012; the current administration’s economic reform approach, mooted at the Third Plenum in October 2013; and public concern and uncertainty about the long-term viability of China’s growth model. Below we summarize some of the key issues raised by influential economic commentators.

Hopes for reform

To date, many commentators have noted with approval the government’s stated intention to loosen controls, cut down bureaucracy and ease the state’s grip on various sectors of the economy. In an article titled A Groundbreaking Year for Reform in China 中国改革元年 Qu Hongbin 屈宏斌, Chief China Economist and Co-Head of Asia Economics at HSBC Bank predicted that this process of decentralisation 简政放权 (lit. ‘simplification of government and loosening of power’) would produce:

a radical lowering of the thresholds for entry into several service sectors such as railways; urban public transportation; the medical and aged care industries; financial services; and environmental protection…We believe that the government will reduce the number of steps required to obtain administrative approval and the number of administrative vetting processes, with the effect of reducing expenditures on public administration. Government action against corruption and wastage will thus be strengthened.

Wang Tao 汪涛, Chief Economist for China operations at UBS Investment Bank, made a more specific prediction, noting that some reforms such as the decentralisation of investment approval rights, relaxing of hukou 户口 (residence permit) restrictions and finance deregulation are bound to stimulate urbanisation-related investment. Similarly, Boston Consulting Group pointed out the enormous potential of the current administration’s reform plans to drive economic developments nationwide:

…these bold new programs [enjoy] backing by central government while bringing these ambitions to their provincial governments and setting parallel growth goals at home. Detailed plans for reform and accelerated growth will be set, and then promptly executed, in geographies across China.

Researchers based at government think tanks, such as the authors of a recent report by the Academy of Macroeconomics Research at the National Development and Reform Commission, have highlighted the benefits of simplifying cross-border financial transactions such as the promotion of cross-border business conducted in RMB, the Chinese currency, and the acceleration of trade-related capital flows.

But not all commentators hold such positive views. Sheng Hong 盛洪, the director of Unirule Institute of Economics, an independent think tank, expressed his doubts about the implementation of these economic reforms:

The most highlighted point [to let the market decide the allocation of resources 市场在配置资源中起决定性作用] is also the most abstract principle; in real-life China, the more abstract the principles are, the less likely they will be implemented… in fact the previous administration had already posited the market as ‘the basic system for allocating resources 配置资源的基础性制度’, but in fact there were more and more government interventions in the market… This trend will not be reversed just because the rhetoric has changed.

Housing prices in third and fourth tier cities to go down?

There are a number of commentators such as Andy Xie 谢国忠 who believe housing prices in so-called first-tier cities like Beijing and Shanghai will go down. Xie, a prominent commentator and formerly Asia-Pacific economist at Morgan Stanley, has now become an independent economic consultant based in Shanghai. He believes that housing prices could fall by as much as fifty percent in 2014.

However, a more typical view is that housing prices in the big metropolises will remain buoyant even if there are contractions elsewhere. For example, on 20 February 2014, Ren Xingzhou 任兴洲, the director of the Market Research Center at the State Council’s Development Research Center claimed that housing prices were still on a upward curve:

The land leasing revenue [which is closely associated with housing prices] for Beijing, Shanghai, Guangzhou and Shenzhen combined was 510 billion yuan [for 2013], which is a 181.72 percent growth compared to 2012, and the highest in history.

Many analysts from industry, the university sector and financial institutions believe that third- and fourth-tier cities will see falls in housing prices because the existing inventory is already high, while local governments are continuing to build low-cost housing. They predict that demand will also soften with the continued migration of provincial and rural residents to first-tier cities. Some have noted that property taxes might play a role in housing price drops. For instance, Shen Jianguang 沈建光, chief economist at Mizuho Securities Asia commented approvingly that ‘property taxes would restrain excessive demand and prevent wasteful, investment property purchasing.’

(Note: While it is very common in the Chinese media to rank Chinese cities, there is actually no official or formal tier-system as such. Nonetheless, Beijing, Shanghai, Guangzhou, and sometimes Shenzhen are generally described as first-tier cities. Nanjing, Wuhan, Chongqing, Tianjin, Shenyang, Hangzhou and other major provincial capitals, as well as key cities in relatively rich provinces, are called second-tier cities. Cities that are neither provincial capitals nor economically powerful are described as third- and fourth-tier cities.)

A fear of housing bubbles persists in many media commentaries. Li Yang 李扬, Vice-President of the Chinese Academy of Social Sciences, sees current property values as inflated:

[One of the five risks facing the Chinese economy is that] actual reasons for the rise in property prices remain unclear. Financial institutions have thus already made preparations for possible falls in the future.

Useful links and sources
Ye Tan’s blog: 2014年中国房地产市场前瞻
FT Chinese: 2014:中国经济大变革前夜?, 2014年的中国:增长持稳,改革加快
Caijing: 屈宏斌:中国改革元年
Harvard Business Review: Ten Predictions for China’s Economy in 2014
People’s Daily: 2014中国经济可能爆发危机吗——大改革与大转型中的中国经济
China Economic Daily: 回眸良好开局 前瞻经济走势 ——2014年宏观经济形势分析及建议
Xinhua: 社科院下调投资增长率预测至19% 称经济增长面临五风险
Caijing : 中国改革应防行政架空
Cnfol.com:房地产泡沫正破灭 2014年房价跌50%
Xinhua: 学者:一线城市房价还有上涨空间 三四线城市存风险
People.com.cn: 全国楼市分化:一二线城市上涨 三四线城市冷清
Xinhua:2014年房产税新政 或降低房价上涨速度