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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

China real estate comments

Posted by WARREN MOSLER on June 27th, 2011

Yes, China understands it’s unlimited ability to support demand through deficit spending that includes funding through state owned banks.

The limits are their tolerance of inflation.

The question remains whether they can deliver a soft landing, rather than a hard landing, in their efforts to dampen inflation.

While theory says it’s possible, I’ve never seen it.

Other analysts say there are far more leveraged purchases of real estate than recognized in the official statistics.

To fight the effects of the global downturn, Chinese state-owned banks, on government orders, loaned about $3 trillion, mostly to giant state-owned enterprises. The money was reported to have largely financed infrastructure projects, such as China’s ambitious high-speed railway network.

But many of the loans wound up financing real-estate purchases instead, said Deng Yongheng, director of the Institute of Real Estate Studies at the National University of Singapore.

Prices at auctions for residential land in eight major cities doubled in 2009, largely because of highly leveraged purchases by state-owned companies, he and three co-authors calculate. In March 2010, state-owned companies bid up the price of one piece of Beijing land to 10 times the asking price, according to one analyst.

The magnitude of the leveraged purchases is hard to gauge.

One indication: Shortly after the Beijing land sale, the Chinese agency that oversees state-owned companies, ordered 78 firms–whose charters had nothing to do with real estate–to cease buying and selling property. Nearly a year later, in Feb. 2011, state-owned Xinhua news agency reported that just 14 firms had left the business and another 20 were expected to get out later in the year.

A spokesman for the agency said that the firms needed time to finish their projects, but added that there isn’t any prohibition against companies owned by provinces or municipalities to continue to invest in real estate.

8 Responses to “China real estate comments”

  1. Gary Says:

    So China suffers from real estate bubble, while they understand and use the deficit spending. Doesn’t that show that those saying that taxing unearned income is priority, and that even deficit spending won’t help before that is taken care of – are actually right?

    I mean – government can deficit spend as much as it wants, but if money is used to inflate land and property prices – it will destroy economy all the same (well, it will certainly help afterwards).

    Reply

    Gary Reply:

    @art,

    Thank you. Very interesting. My opinions about rent are based on Michael Hudson.

    Reply

  2. Bolo Says:

    Hi Warren,

    Would you be able to spell this out a bit more clearly for those of us who are still learning MMT? Is China’s reaction to inflation rational, or is it based on the same kind of irrational fear that the US has of deficit spending? Is their deficit spending leading to the inflation and, if so, why? How does this gel with MMT?

    Gary, above, seems to touch on this, but it would be very helpful for just a little bit more explanation.

    Thanks!

    Reply

    WARREN MOSLER Reply:

    The fear is real in that inflation can mean regime change whether it matters for the economy or not.

    Reply

  3. Paul Palmer Says:

    It’s not just real estate. Chinese banks have made loans that have put massive amounts of manufacturing capacity in place that are becoming less likely to ever be utilized as western economies’ growth slows. Those loans won’t get paid off either.

    Reply

    WARREN MOSLER Reply:

    A lot like our military spending

    Reply

  4. Marcello Says:

    Unrelated question,

    What happens to the employment numbers when all the servicemen and subcontractors start coming home from Afghanistan and Iraq?

    Seems like they will add to the unemployment?

    What about all the money spent on the war? Isn’t that a stimulus?

    Reply

    Tom Hickey Reply:

    @Marcello,

    It’s called “military Keynesianism,” and they will find some other reason funds need to increase for national security. Without military spending, there would be about a trillion dollar shortfall in spending per year spread out over most congressional districts in the US. Go figure.

    Reply

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