Chinese saving options

Here’s Yichuan Wang on Chinese saving options:

What I think is sometimes forgotten is that Chinese citizens face a severe shortage of effective ways to save money to ä¿å€¼, or preserve value. Bank deposit rates consistently run below the rate of inflation. When better investment opportunities come along, those deposit rates don’t necessarily rise. There are securities companies, but it’s very difficult for the people to trust them. Moreover, given the recent explosion in these companies, it’s not hard to imagine that any risk-adjusted excess returns on securities should quickly go to zero. The stock market is seen as a capricious creature, and given past stock crazes involving nannies and farmers, people are right to be suspicious of investing in stocks as a way to secure wealth.

Let’s say that’s all true.  Does it suggest a market failure?  Does it suggest that the Chinese are putting “too much” money into housing?  Maybe, but that’s not clear to me.

Suppose there were no capital controls distorting the Chinese economy.  Would the Chinese people be able to earn positive real rates of return on bank savings accounts?  I don’t see how.  The interest parity condition says Chinese rates should be the same as US rates, after adjusting for the expected change in the value of the yuan.  Since the yuan is unlikely to depreciate significantly over time, Chinese rates on risk free bank accounts should be no higher than the roughly zero percent earned on US bank accounts.

Of course if China was a laissez-faire paradise then it would be growing much faster, and it’s possible that the Chinese could earn higher rates of return in investments such as equities.  But it isn’t.  Given the nature of the actual Chinese economy, where returns on non-residential investments are not all that high, housing might not be a bad option.

BTW, regarding the earlier discussion of vacant Chinese apartments by Christopher Balding, I found this interesting data on Chinese apartment vacancies:

Beijing’s New Home Inventory Hits Four-year Low


: The Beijing News, ChinaScope Financial (Data)

Data from the Beijing Municipal Commission of Housing and Urban-rural Development shows that as of September 2, Beijing’s new residential properties available for sale hit a new low since 2009, totaling 77,104 units. 50,879 units of the total inventory were pre-sale homes. Based on the home transaction volume last month, real estate developers needed only five months to clear out the inventory.

ZHANG Dawei, Director of the Market Research Department at Beijing Centaline, believes that more than 10,000 new homes were sold in each of the four months since May, which has helped shorten the destocking cycle. Meanwhile, the low inventory was due to the decrease in residential housing and land supply.

Beijing Properties’s destocking cycle is shortening as transaction volumes have picked up in 2012 and developer supply has decreased.

Note that while 77,000 sounds like a lot of unsold units, Beijing’s population is over 20 million.  Of course units can remain vacant even after being purchased.  Nonetheless, Chinese housing prices are edging upward again, after a pullback during 2011 and early 2012.  Commenter Ben Zhan pointed out that if Beijing had 3.8 million vacant apartments, then the other 3.8 million units would contain Beijing’s entire population.  Which doesn’t seem very likely given that Beijing families are generally quite small.  He also pointed out (in a subsequent comment) that Beijing’s per capita GDP is more than $1000/month, not the $435 figure cited by Balding.

Here’s Stephen Roach on the “overbuilding” theory:

Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990s became a fully occupied urban center, with a population today of roughly 5.5 million. A McKinsey study estimates that by 2025 China will have more than 220 cities with populations in excess of one million, up from 125 in 2010, and that 23 mega-cities will have a population of at least 5 million.

China cannot afford waiting to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely.

All of this is part of China’s grand plan. The producer model, which worked brilliantly for 30 years, cannot take China to the promised land of prosperity. The Chinese leadership has long known this, as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns'” critique – warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable” economy.

Two external shocks – first from the US, and now from Europe – have transformed the “Four Uns” into an action plan. Overly dependent on external demand from crisis-battered developed economies, China has adopted the pro-consumption 12th Five-Year Plan (2011-15), which lays out a powerful rebalancing strategy that should drive development for decades.

The investment and construction requirements of large-scale urbanization are a key pillar of this strategy. Urban per capita income is more than triple the average in rural areas. As long as urbanization is coupled with job creation – a strategy underscored by China’s concomitant push into services-led development – labor income and consumer purchasing power will benefit.

Contrary to what China doubters say, urbanization is not phony growth. It is an essential ingredient of the “next China”, for it provides China with both cyclical and structural options. When faced with a shortfall of demand – whether owing to an external shock or to an internal adjustment, such as the housing-market correction – China can tweak its urbanization-led investment requirements accordingly.

This long paper by Credit Suisse provides a detailed examination of the Chinese housing market, in case anyone is still interested.



3 Responses to “Chinese saving options”

  1. Gravatar of Costard Costard
    9. September 2012 at 14:28

    Negative real rates suggest the same thing in China as here: that the monetary authority is providing subsidies to those obliged to pay interest. In our case this means the banks, who profit from IROR and investment banking while paying out less in interest on deposits. For China this means the SOE’s and others who have borrowed heavily to fund investment — and enriched countless Party members. Neither one suggests a market failure, but an intentional policy with perhaps some unintended consequences.

    If there were no capital controls distorting the Chinese economy, China would be deflating. What matters the real interest rate when cash earns high margins? And though few economists might see it this way, such a rebalancing would be healthy. Personal consumption would recover from historically low levels; wealth would transfer from the communist party and state enterprises – net debtors – to small businesses and individuals.

    A more succinct reply would be, that capital controls affect the flow of capital by definition. There’s no question that China’s housing market has become speculative, but whether this speculation is justified depends upon politics rather than economics. Do they rebalance now, or later? Whether certain economists come out looking smart, and best-laid predictions come true, is less important than the fact that China, like us, has followed policies that beg for a crisis.

  2. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2012 at 17:47

    OT, but related: The New York Review of Books just reviewed three books on China, including James Fallows’ book.

    My sense from reading the review is that the danger to China is that success will lead to ossification of powerful state agencies and monopolies.

    This will stifle proper resource allocation. But the same thing happens in the USA. We will ever get a return on the $4 trillion in costs and liabilities of our Iraqistan efforts? How about the new $12 billion in liabilities due to Medicare Part B?

    So China may misallocate resources and retard growth, just as we do.

    I still wonder if economists should pay more attention to 1) monetary policy 2) culture, particularly the work ethic, honesty ethic and proper governance gene.

  3. Gravatar of Major_Freedom Major_Freedom
    10. September 2012 at 05:24

    “Suppose there were no capital controls distorting the Chinese economy. Would the Chinese people be able to earn positive real rates of return on bank savings accounts? I don’t see how. The interest parity condition says Chinese rates should be the same as US rates, after adjusting for the expected change in the value of the yuan. Since the yuan is unlikely to depreciate significantly over time, Chinese rates on risk free bank accounts should be no higher than the roughly zero percent earned on US bank accounts.”

    Suppose that there was no central bank in China. Or, suppose the PBOC announced that it will stop inflating tomorrow; no longer do they engage in any OMO to buy dollars to keep the Yuan low, and no longer do they purchase any government debt to keep interest rates low. Suppose they only promised to inflate in the case of “lender of last resort” conditions (i.e. the publicized excuse for the Fed’s original purpose).

    What would happen? The artificial demand for debt would decline, credit expansion would decline, and interest rates would rise, revealing all those investments dependent on cheap money as malinvestments. Unemployment and idle resources will rise. (This should not be a problem for “market” monetarists, since they are OK with unemployment and idle resources rising at the individual firm or economy-wide levels to any degree, as long as AD rises by X% each year. So if they don’t get AD to rise X% per year, then they can’t use the temporary increase in unemployment and idle resources as a premise. After all, I recall Sumner saying many months ago that if NGDP rises 5% per year, then unemployment can go to 50% and he still won’t budge).

    Interest rates on government dent would rise because there would no longer be a demand from the central bank for government bonds. Corporate bond rates and savings account rates would also rise, as the fractional reserve Chinese banks would find that they cannot expand as much credit as before, due to the fact that they will be competing for a fixed supply of reserves in the overnight market (which operates to reduce credit directly through pyramid principle), as well as competing for a growing supply of capital assets with a fixed supply of money (which operates to reduce credit indirectly through reduced prices of capital assets and thus bank balance sheets). Interest rates would come to reflect actual Chinese savings rates. The structure of production would tend to align in a more temporally coordinated fashion.

    Once wage rates and assets prices adjust to the new monetary conditions, millions of poor Chinese would finally be able to accumulate savings and capital at a decent interest rate, and there will be an added bonus of a reduction in the artificially high demand for housing which was founded on artificially low interest rates, and “market” monetarists can be relieved that they will no longer have to awkwardly defend the real estate situation in China.

    This is how the economist ought to think.

    But we all know “market” monetarists are political strategists more than economists, so rather than question statesmen, rather than advocate for statesmen to do what economic principles tell us should be done if goal X is going to be desired, they will take a more apologetic route, paying lip service of course to free market ideas, but not truly going in that direction due to a jealous protection of their own anti-market life’s work in the “science” of monopoly toilet paper production. So we’ll see half assed attempts to reconcile two mutually exclusive paradigms (political process and market process), and because Chinese AD is growing at near double digit rates year after year, “market” monetarists cannot really blame insufficient inflation for A through Z problems in China, so we’ll see an especially conspicuous absence of hard-core criticism of PBOC policy, but lots of strained and evasive deflections of the real estate situation in China.

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