Economic Soft Landing: A Common Desire

By staff reporter LUO YUANJUN

AN economic soft landing refers to steady deceleration of an overheated economy to a more moderate rate of growth. As such, it may appear to relate to government macro adjustment rather than the desire of the common people. But its effect is one of cooling down fierce economic growth that exerts high pressure on daily life and is, therefore, of benefit to them.

Food

Grain price rises have stimulated grain production.

Grain price rises in recent years brought small economic benefit to farmers and had adverse impact on consumers, particularly low-income families and farmers-turned migrant workers in urban areas. Since government macro adjustment, grain prices began to fall in late 2004. Chinese citizens anticipate 2005 as the year of the Chinese economy’s soft landing.

Rising food prices were a conspicuous feature of Chinese economic life in 2004. According to statistics issued by the State Statistics Bureau on September 13, 2004, grain prices rose by 31.8 percent in August 2004, edible oil by 22.5 percent, meat and poultry and their products by 23.5 percent, eggs by 30.3 percent, aquatic products by 15.6 percent and vegetables by 5.8 percent. Price increases of this magnitude are alarming by any standard.

In recent years, farmers have operated at a loss owing to low prices on agricultural produce and rising production costs. Those in some areas have left the land altogether in search of an alternative livelihood. Natural disasters such as floods have exacerbated the situation by reducing grain yields, forcing the government to make supplements from grain reserves. Consumer product price rises in tandem with those of grain have increased the threat of inflation.

Specific measures taken by the government encouraging farmers to stay on the land have had a positive effect. They include exemption and deduction of agricultural taxes and increased subsidies. Not so long ago farmers were prepared to pay third parties to farm their plots and benefit from their harvests while they went to the city to find work in the non-agricultural sector. Many have now returned to their land.

As one farmer from Anhui Province confirms, grain price rises were of far greater benefit to traders than to farmers. He asks, “How can farmers get the upper hand over traders, whose greater access to market information makes them so much shrewder than we could ever be? If the government really wants to benefit us farmers, they should implement direct subsidies.”

Local cadres in Shandong’s Zaozhuang deliver government documents concerning reduction of farmers’ financial burdens to every household.

In the meantime, grain price rises have dealt a body blow to low-income citizens. In late 2003, the number of poor urban residents subsisting on state aid stood at 22.468 million. To them, grain price rises were disastrous. In order to ease their plight, on July 1, 2004 the Beijing municipal government implemented classified and special-item relief policies while maintaining the minimum subsistence subsidy of 290 yuan per person per month.

Farmers engaging in casual manual labor in cities fare even worse than poor urban residents. In 1993 Bao Richang found work in Guangzhou as a security guard at a monthly salary of 600 yuan. He considered this fair pay for clean, undemanding and regular work. In 2003 his son Bao Ming left the countryside to join him, but turned down the security guard job Bao Richang had arranged for him at the same salary, saying “Ten years ago, a meal cost only two yuan compared with today’s five yuan. How much does that leave me out of 600 yuan? I’d be no better off than farming at home.”

According to a recent investigation by the Shanxi Provincial Federation of Trade Union, the majority of farmers-turned workers in Shanxi engage in dangerous manual labor such as mining and construction. Their monthly salaries are low; 8.6 percent of them get less than 300 yuan per month and 24.3 percent earn between 300 and 500 yuan (less than the lowest local wage level for 2004). As they need to buy grain products to feed themselves, higher grain price rises were a serious problem.

In 1978 the Engel coefficient (the share of income spent on food) for Chinese rural households was 67.7 percent and 57.5 percent for urban households. In 2003 it dropped to 45.6 and 37.1 percent respectively as Chinese consumption, particularly in cities, made the transition from subsistence to luxury. Less than a year later, however, this progressive trend reversed.

According to an investigation by the household section of the Henan Provincial Urban Social-Economic Survey Team, in the first half of 2004 the residential consumption level in Henan rose by 5.6 percent compared with the same period the previous year. This increase, as a consequence of continuously rising market prices, was attributable to more spending on food than non-food items. As food prices climbed, urban residential consumption further tilted toward daily necessities, bringing a rise in the Engel coefficient and a heavier burden on low-income families.

Price increases on agricultural products caused by continuous decreases in domestic yields and higher prices on the international market increased prices of consumer goods and posed a greater threat of inflation. In order to realize an economic soft landing and curb price rises, therefore, it is imperative that the Chinese government expedites macro adjustment in 2005.

Housing

Migrant workers are predominant among laborers on urban construction sites.

Overheated real estate investment is generally the major culprit of an overheated economy. If the housing rights of middle- and low-income families cannot be guaranteed, the Chinese government faces serious social problems. The October 2004 rise in RMB interest rates, the first in nine years, to some extent checked real estate investment. In 2005, many Chinese citizens hope to see housing prices drop to an even more rational level.

Hou Jun, 34, works for a government office in Beijing. She is unmarried because she has not been able to save enough from her monthly salary of 2,500 yuan to be able to buy a place of her own. After looking at the first stage project of an apartment in the western suburbs priced at 4,000 yuan per square meter she fully intended to buy an apartment, but when the second stage project was completed and put on sale, the per square meter price had shot up to 6,000 yuan -- far beyond her means. She is now at a loss as to what to do. Commodity housing projects, such as the one she enquired after in the western suburbs, are too expensive, and she is reluctant to join the squeeze-and-grab crowd for cheaper apartments in government-sponsored economic housing projects.

Those more economically minded, however, are in favor of this high-price real estate market trend. At a talk in Nanjing, economist Wang Jian made the bold forecast: “Conservatively speaking, housing prices in big cities such as Beijing, Shanghai and Nanjing, will triple in the coming decade. Optimistically speaking, they will quintuple.” One entrepreneur responded: “I am happy to hear such encouraging words, but regret not having caught wind of this earlier, as I would otherwise have bought several more houses.”

Less financially favored people fail to see the humor in such entrepreneurial declarations. In the case of Hou Jun, buying an 80-square-meter commodity housing apartment at 6,000 yuan per square meter would entail putting aside 10,000 yuan a year for 50 years. Chinese real estate prices are simply too high for the average Chinese consumer.

There are three main reasons for China’s real estate boom. One is the traditional belief that, as regards family assets, property is the best investment, as stocks and shares may devalue but bricks and mortar do not, and often appreciate in value. In marketing terms, accelerated urbanization in China has increased the demand for housing, and rampant real estate promotion on the part of developers throughout the media has worked to hype up market prices.

The last, and most sinister reason is attributable to recent reports of a certain foreign investment institution’s having “covertly” poured large sums of money into the Chinese real estate market, inducing the resultant overt Chinese real estate bubble. It would appear that the Chinese real estate market’s healthy development is being influenced by this foreign entity, whose intent is to create a Chinese real estate bubble that brings it lucrative opportunities. Generally speaking, an industry with healthy stable growth does not see sudden influxes of social investment within a short period of time.

In late November 2004, the State Development and Reform Commission Economic Research Institute issued a report entitled, Adjust Monetary Policy and Alleviate Fund Stringency. The report disclosed that more than US $100 billion floating funds had entered China’s mainland from abroad. It stated: “In the first half of this year (2004) foreign debt increased by 16 percent, reaching more than US $200 billion, 50 percent of which is short-term debt of a nature similar to that of ‘floating capital’.” Statistics show that real estate is the main destination for these foreign “floating funds.”

High-priced commodity housing projects attract few buyers.

For five years Hangzhou’s real estate price rise has remained one of the top three among 15 deputy-provincial-level cities and four municipalities directly under the central government. Since 1999 its real estate market has experienced increasing investment and sales growth, and local consumers have continued to evince strong purchasing power. Its prices over the past five years have increased by 30 percent.

In order to cool down overheated housing transactions, as of January 1, 2004 Hangzhou levied a 20-percent transaction tax on second-hand housing. But the policy was quietly suspended on September 1 the same year as it had, paradoxically, started to function as a propeller of higher real estate prices, as sellers were imposing tax under-the-table on house buyers.

Hangzhou’s situation is a case in point indicating the need for a soft economic landing. A market economy is an holistic entity in which individual trade policies are insufficient to solve individual problems. Overall excessive economic growth can only be checked by a soft descent of the entire economy.

Today, 72 percent of Chinese city residents own their own housing. Many worry that a drop in housing prices will mean losses, particularly those with mortgages. However, it is generally understood that property prices must be curbed, particularly in consideration of the damage to Hong Kong’s economy after having been at the epicenter of the recent Asian Financial Crisis. Concludes Dr. Yin Zhongli from the Chinese Academy of Social Sciences, “From a short-term perspective, real estate speculation can stimulate economic growth, but in the long-term, such stimulation differs little from an overdraft; it does not create real economic prosperity.”