Saturday 31 July 2010

The Chinese Housing Bubble - 40% falls possible

I have long been a raging bear on the Chinese housing market. This is a result of a number of China specific factors. (1) lack of assets to invest in (2) the actions of state owned companies including the army that are dangerously addicted to speculation and not doing what they are supposed to do.

This recent CEPR paper looks at this issue in detail. I tend to agree with their headline figures and the results match my own concerns.

40% falls are a real possibility. The fact that the authors pick up on the state owned company problem show that these authors are on the ball.

"Evaluating Conditions in Major Chinese Housing Markets"

NBER Working Paper No. w16189

JING WU, Institute of Real Estate Studies, NUS, Institute of Real Estate Studies, Tsinghua University

JOSEPH GYOURKO, University of Pennsylvania - Real Estate Department, National Bureau of Economic Research (NBER)

YONGHENG DENG, National University of Singapore

High and rising prices in Chinese housing markets have attracted global attention, as well as the interest of the Chinese government and its regulators. Housing markets look very risky based on the stylized facts we document. Price-to-rent ratios in Beijing and seven other large markets across the country have increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. Our calculations suggest that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting rent increases or other countervailing factors. Price-to-income ratios also are at their highest levels ever in Beijing and select other markets. Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.


Friday 30 July 2010

China's Growth to 2030: The Roles of Demographic Change and Financial Reform

This paper is worth a quick glance. What is interesting is the acknowledgement that China's population is not growing so quickly or will even start to contract. I am not convinced that this is true.

China's Growth to 2030: The Roles of Demographic Change and Financial Reform

Rod Tyers
Australian National University (ANU) - School of Economics

Jane Golley
Australian National University (ANU) - Faculty of Economics & Commerce

Review of Development Economics, Vol. 14, Issue 3, pp. 592-610, August 2010

China's economic growth has, hitherto, depended on its relative abundance of production labor and its increasingly secure investment environment. Within the next decade, however, China's labor force will begin to contract. This will set its economy apart from other developing Asian countries where relative labor abundance will increase, as will relative capital returns. Unless there is a substantial change in population policy, the retention of China's large share of global FDI will require further improvements in its investment environment. These linkages are explored using a global economic model that incorporates full demographic behavior. Financial reform is measured by the effect of declining intermediation costs on the wedge between home and foreign borrowing rates, or the “investment premium.” The influence of this wedge on China's projected economic growth performance is investigated under alternative assumptions about fertility decline and labor force growth. China's share of global investment is found to depend sensitively on both its demography and its interest premium, though the results suggest that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labor force.


Thursday 29 July 2010

Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

I do a lot of work on Chinese trade and it's relationship with ASEAN. Is China a help or hindrance?

This recent RDE paper makes some progress on this issue.

Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

Yunhua Liu
Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Beoy Kui Ng
Nanyang Technological University (NTU)

Review of Development Economics, Vol. 14, No. 3, pp. 666-682, August 2010

The emergence of China as one of the largest trading nations in the world provides challenges and opportunities to its neighboring ASEAN countries. In the face of the rise of the Chinese economy, there were concerns that ASEAN economies may be adversely affected with the loss of competitiveness in the international market. One of the concerns is that the world export markets of labor-intensive goods will be threatened if China turns into the world low-cost manufacturing factory. Meanwhile, trade between China and ASEAN countries increased dramatically during the past decades. Not surprisingly, China's accession to the WTO and the future establishment of a free trade area (FTA) between ASEAN and China will further change the trade relations in the region. The paper first analyzes the past trade patterns between China and ASEAN countries and assesses the impact of the rising Chinese economy on ASEAN countries, in particular, the impacts on specific industries in each individual ASEAN country. Second, the paper examines the ever-increasing role of foreign direct investment between the two regions and, finally, it analyzes and assess the policy responses of the ASEAN countries thus far and their possible consequences.


Water pollution in China - 1/4 gone, 3/4 left (for now)

In China's thirst for growth it is in danger of having the breaks applied very sharply from environmental contraints none more important that a lack of clean water.

China might, just might, be getting on top of air pollution but water pollution remains a serious problem. The sheer scale effect of China's growth will mean the battle against PM10 and air pollution is far from over.

Pollution Makes Quarter Of China Water Unusable: Ministry [PlanetArk]

Almost a quarter of China's surface water remains so polluted that it is unfit even for industrial use, while less than half of total supplies are drinkable, data from the environment watchdog showed on Monday.

Inspectors from China's Ministry of Environmental Protection tested water samples from the country's major rivers and lakes in the first half of the year and declared just 49.3 percent to be safe for drinking, up from 48 percent last year, the ministry said in a notice posted on its website (

China classifies its water supplies using six grades, with the first three grades considered safe for drinking and bathing.

Another 26.4 percent was said to be categories IV and V -- fit only for use in industry and agriculture -- leaving a total of 24.3 percent in category VI and unfit for any purpose.

Despite tougher regulations over the last decade, the ministry has struggled to rein in the thousands of small paper mills, cement factories and chemical plants discharging industrial waste directly into the country's waterways, and the overuse of fertilizers has also left large sections of China's lakes and rivers choking with algae.

The ministry said there were noticeable improvements in air quality throughout the country's cities in the first half of 2010, with sulphur dioxide emissions declining 30.2 percent compared to last year.

Airborne particulate matter in China's cities fell 12.1 percent and nitrogen dioxide declined 5 percent, the ministry said.

However, 189 out of 443 cities monitored suffered from acid rain in the first half of the year.


Thursday 15 July 2010

Climate and war in China

As an academic with an interest in the fascinating history of China the following article on the impact of climate change on war and civil unrest is very interesting.

There is no doubt that droughts will cause future unrest. The government will need to be prepared.

Cooling Caused Wars And Drought In China [PlanetArk]

As Chinese policymakers grapple with an expected increase in extreme weather due to global warming, a study has found that periods of cooling between AD 10 to 1900 also caused a wave of disasters, war and upheaval.

Droughts and locust plagues caused by cooler spells probably triggered internal wars, the authors said.

In a modern day parallel, China, the world's top emitter of greenhouse gases blamed for heating up the planet, has taken steps to curb emissions growth fearing growing social unrest from environmental degradation.

Zhibin Zhang of the Chinese Academy of Sciences and his team used historical records and paleoclimatic reconstructions covering nearly 2,000 years.

They found that the frequency of wars, droughts and floods, price of rice, locust plagues and temperatures in China were positively associated within time bands of around 160 and 320 years.

The study was published in the latest issue of the journal Proceedings of the Royal Society.

"Our study suggests that the food production during the last two millennia has been more unstable during cooler periods," the authors said.

This resulted in more social conflict owing to rebellions within dynasties and/or aggression from northern pastoral nomadic societies in ancient China, they said.

The collapses of the agricultural dynasties of the Han (206 BC-AD 220), Tang (681-906), Song (960-1279) and Ming (1368-1643) were more closely associated with low temperature, they said.


"It is very probable that cool temperature may be the driving force in causing high frequencies of meteorological, agricultural disasters and then man-made disasters (wars) in ancient China," they said.

In particular, the results suggested that periodic low temperatures could have increased the frequency of internal wars mainly indirectly through increasing drought and locust plague frequencies between AD 950 and the 1900s.

They said external aggression wars mostly occurred between Chinese dynasties and the pastoral nomadic societies to their north, such as the Manchus who overthrew the Ming dynasty.

A cooling of a few degrees Celsius can shorten the northern growing season of grass by 40 days, adversely affecting grasslands and causing huge losses of domestic livestock. This pushed northern tribes south.

The authors found two predominant periodic bands of around 160 and 320 years during past two millennia.

"These periods may be related to cyclic variations of solar activity, or cyclic changes of orbit position of the Earth," they said, pointing to 87 and 210-year cycles of solar activity based on observations of sunspots.

"It is generally believed that global warming is a threat to human societies in many ways. However, some countries or regions might also benefit from increasing temperatures in some ways," the authors said.

The global climate has natural variations in temperature and rainfall but scientists fear the rapid accumulation of greenhouse gases since the Industrial Revolution could lead to catastrophic climate change unless emissions are sharply reduced.

"However, the present on-going global warming may produce different effect on our industrialized societies which own much higher capacity of dealing with natural disasters than pre-industrial societies," they say in a pointer to China's rapid rise to become the world's number 3 economy.