Kenneth Rapoza on the Chinese Property Market

Kenneth Rapoza on the Chinese Property Market

The potential for a property market bubble developing in China is a complex but important issue, making Kenneth Rapoza’s choice to cover the subject pertinent. This essay will analyse two articles from the key 2011-2013 period, considering elements of content and structure. It will be shown that, while there are difficulties in establishing a causal link between the two, there is a discernable thematic development from a situation of potential danger in 2011 to relative stability in 2013, which Rapoza attributes to the actions of the Chinese government; additionally, it will be argued that, although Rapoza takes into account many of the key issues regarding the property market in China, his failure to recognize the role of State Owned Enterprises (SOEs from here) makes his conclusions potentially over-optimistic. It will be necessary then, to establish the key elements of content and structure from the 2011 and 2013 articles and to compare them. Once the overarching narrative has been established, the role of SOEs will be characterized within the context of Rapoza’s articles.

Kenneth Rapoza’s 2011 article, ‘Why China’s housing bubble is different,’ and his 2013 article ‘China’s non-bubble housing bubble,’ describe the “overheated property market” in China. An overheated market is one in which high levels of growth are likely to cause inflation—a rapid increase in prices (Smullen & Hand 2005, p. 299). At the extreme end, this rise in prices can cause a speculative bubble, where the cost of assets becomes much higher than their actual value (Smullen & Hand 2005, p. 50). The prospect of a housing bubble in China is a key issue because China’s continued growth is increasingly important to the global economy (Barkham R 2012, p. 175), and the property sector is an inexorable part of that growth (Chen & Funke 2013, p. 39). Additionally, as Rapoza points out, an inflated property market was one of the root causes of the Global Financial Crisis (GFC from here), making many experts vigilant for signs of a similar situation developing in China.

Rapoza’s 2011 article, then, addresses a key issue within the economical field; however, before examining its content, it will be useful to consider the way it is structured. In general, the article is comprehensive but loosely structured, moving from commentary on the development of the Chinese’s property market, to potential dangers to stability and growth and, finally, to mitigating circumstances that make China’s situation different, with particular emphasis on comparison with the US. This comparison is—again somewhat loosely—sustained throughout the article. Rapoza’s narrative utilizes a mixture of his own views, those of experts, and figures from the National Bureau of Statistics in China. These structural arrangements create a complex and uncertain picture, which, while making the author’s perspective difficult to discern, actually agrees with its subject, which will now be analyzed.

The key elements of Rapoza’s 2011 article’s content can be summarized as, (1) the nature of the overheating property market and its causes, (2) the government’s ­­­response to the situation, (3) extra information that makes China’s situation unique. Firstly, Rapoza’s article describes the situation in China’s property market. The growth, he explains, is market wide and particularly strong in large coastal cities. Rapoza attributes this growth to foreign investment, low interest rates, the low Chinese dollar, and China’s economy-wide growth. Secondly, the article discusses contemporaneous attempts by the Chinese government to “cool” the market. These measures include raising interest rates, lifting down payments on purchases and trialing a new real estate tax. Finally, Rapoza describes some of the circumstances that are unique to China, with a particular emphasis on comparison with the US. These include perceived positive differences, like the Chinese people’s proclivity for saving, the stability of the Chinese banking sector and the government’s willingness to regulate the market, as well as negative factors like the dangers posed by diminishing growth and the overreliance of the Chinese economy upon “big banks, big enterprises and big government”(Jianmao in Rapoza, 2011). This, then, is broadly the situation described in Rapoza’s 2011 article.

Rapoza’s 2013 article, ‘China’s non-bubble housing bubble,’ describes the Chinese housing market, which, while still strong, has cooled significantly. Again, this article mixes the author’s own voice with those of experts and utilizes the China-US comparison. Its structure is very loose, and lacks the comprehensive and nuanced perspective of the first article. The first third covers the “cyclical downturn” created by the Chinese government, implicitly endorsing these efforts. The second considers a recent increase in activity and positions overdevelopment in central China as a potential difficulty in the future. The final third discusses Shanghai’s housing market and relates very little to the central theme of the potential housing bubble. This is the basic structure and content of the second article, which will now be compared with the first with a view to establishing the author’s overall perspective; but first, it is necessary to outline some of the difficulties inherit with such a comparison.

There are some difficulties in trying to establish the causal relationship between the first and second articles that the question implies. As has been shown, the articles are differently constructed and cover slightly different subjects; the second article deals specifically with the housing market not the larger property market of the first article. Indeed, in the second article, Rapoza also veers into discussion of the broader Asian housing market. Furthermore, the first article’s pattern of describing the situation then proposing potential problems, solutions and mitigating circumstances, while comprehensive, means that a clear “situation” is not easily discerned. This is less true of the second article, but the situation Rapoza aims to illustrate is still not clear, particularly due to the irrelevance of the final third. Despite these problems, when the structure and content of the articles are closely compared, an overarching narrative does emerge.

Between the two articles there is a discernable shift in the position of the author. Rapoza’s overarching narrative can be broadly described as: a complex and potentially dangerous situation in 2011, becoming a relatively stable one in 2013, through the agency of the Chinese government. Most obviously the titles of the articles indicate this. However, caution should be exercised in this, as the titles do not precisely reflect the articles’ content. For example, the first article isn’t actually describing a property bubble but an “overheated market” instead. By contrast, where the titles are ambiguous, the structure and tone of the articles create a clear indication of the author’s intent. In the first article these elements create a sense of uncertainty. While the article’s comprehensive nature and the inherent balance in Rapoza’s method mean that a clear situation is not easily discerned, the complexity described, combined with the intermittent statement of potential dangers, creates an implicit sense that the market is at risk. These elements are largely missing from the second article, where Rapoza instead positions the Chinese government as the active rescuer of the market. He uses verbs like “engineering” (a cyclical downturn), “actively trying to pop” (the housing bubble) and “deciding to do something” (about the problem) to demonstrate this (Rapoza 2013). When the potential risk of over-development is mentioned it is within the context of governmental control and is quickly disarmed. The nuance of the first article and the complexity and risk described are thus largely replaced by governmental action. This development is also noticeable when the use of the China-US comparison is observed. In the 2011 article, the effect of the comparison is to remind the reader of the US housing bubble and subsequent GFC, positioning the Chinese situation within this context; most significantly, this occurs at the start and end of the article, framing the entire discussion within these parameters. In the 2013 article, by contrast, Rapoza uses the China-US comparison to emphasize the success of the Chinese government in curtailing dangerous growth. This, then, is the development of the situation as described by Rapoza and how he establishes it, but are there factors, particularly in the second, more optimistic article, that he has missed?

While possessing considerable limitations, Rapoza’s two articles do help to illustrate the degree of control the Chinese government has over their economy. Because of their pragmatic approach to regulation, they are able to steer the economy away from potential dangers, such as the spike in property prices described by Rapoza. However, the Chinese government is not simply the regulator of the market, it is also a key investor. Through its SOEs the Chinese government, on both a national and local level, owns a controlling share of many key businesses, including banks and construction companies. Although Rapoza mentions SOEs within the context of the banking sector, he fails to indicate the level of government ownership in the construction industry. This is key as the SOEs involved in the property market are one of the potential causes of rising prices. However, before demonstrating this point, it is worthwhile considering how SOEs have evolved to this position.

State Owned Enterprises are a legacy of the communist era. During this time, they formed a basic unit of production and distribution, not only employing people in construction and manufacturing but also providing housing and other forms of welfare (Zhang & Rasiah 2014, p. 61). Their role has altered significantly in the reform era. SOEs have been granted increased autonomy to act as agents within the market (Hou 2011, p. 03).  Additionally, a process of consolidation has occurred whereby the SOEs have become larger and more specialized. Control over most of these SOEs has been handed to local governments; however, the central government maintains control over 129 SOEs operating in nationally important industries. This process has resulted in the creation of massive, state owned companies, which balance both private (profit) and public (welfare) interests. Significantly, this means that these largely autonomous SOEs, with both public welfare and profit accumulation motives, have an historical interest in real estate. This has translated to market involvement in the reform era, with 94 of the 129 centrally controlled SOEs, actively involved in real estate (Zhang & Rasiah 2014, p. 58-68).  But what role do they play, and what effect does this have on the property market?

Since 1998, when the Chinese property market was effectively privatized, SOEs have functioned as property developers and speculators. They operate predominantly by leasing land from local governments, developing large estates and then selling them to private individuals (Zhang & Rasiah 2014, p. 64). This process has enabled SOEs to make enormous profits. Although this seems to be a positive development for the Chinese government and economy, there are also problems associated with the rise of SOEs. For example, because of the strength of their position in the market, they are able to make much higher bids for land than private developers. In Beijing, for example, Wu et al. found that, between 2003 and 2010, SOEs paid 27% higher prices for land than private investors (2012, p. 532). Of equal concern is the reliance of local governments on the revenue stream coming from SOEs. Such a reliance, when coupled with the vast sums of money involved, makes the risk of collusion and corrupt practices extremely high. Additionally, as the government owns controlling shares of the SOEs there is an inherent moral hazard in these practices. Moral hazard is a situation where an incentive to engage in immoral or overly risky economic behavior exists because of the assurance of protection (Smullen & Hand 2005, p. 270). For instance, in this example, the SOEs are paying prices well above market value under the aegis of the Chinese government, knowing that if the market were to drop suddenly it would be in the interest of the government, as investors, to bail them out.

The overall effect of SOEs on the property market is not fully understood and must be considered within the broader dynamics of the Chinese economy. These issues feed into bigger questions as to the role of government in the market place. One perspective is that the Chinese government’s position is one of complete dominance. As Leo Goostadt, quoting Professor David Shambaugh shows:

“While the state sector of the economy has shrunk significantly (to approximately 30 percent of the national economy)’, Professor David Shambaugh, a distinguished China specialist has observed, ‘This is deceiving as the state remains the “invisible hand” dominating the economy’. It maintains this control, he explained in an article published in an official newspaper, ‘through state banks, state assets, state ownership, state manipulated prices, state cadres and unpredictable state intervention in various economic sectors” (Goodstadt 2011, p. 13).

This may well paint an overly pessimistic and cynical picture. As has been demonstrated in this essay, and illustrated by Rapoza in his two articles, there are many advantages that the Chinese posses owning to government control of and involvement in the property market. Additionally, many economists agree that in this instance large-scale market manipulation has not caused a speculative bubble, and that, for the most part, the rise in property prices can be attributed to fundamental factors within Chinese economy, such as interest rates and economical growth (Xu & Chen, 2012 p. 74, Shen 2012, p. 1208). However, the fact remains that the risks of collusion, corruption and moral hazard resulting from government involvement in the market, and the full effects of these practices, are not yet fully understood. It may well be, as Wu et al. argue, that SOEs are indeed partly responsible for inflating the market (2012, p. 540). Certainly, this is an area in need of further investigation and close scrutiny in the future, and, as such, something that Rapoza should have considered.

The object of this essay has been to analyse two articles from Kenneth Rapoza from 2011 and 2013, discussing China’s property market, in an attempt to demonstrate the author’s perspective and to consider any shortcomings in his analysis. It has been found that, despite the difficulties in assessing the articles as a pair, there is a developing narrative. Rapoza moves from concern over the stability of the market to a position of surety and attributes this positive development to the Chinese government’s actions. It has been demonstrated that Rapoza’s failure to illustrate the role of SOEs in potentially inflating the market may make his second article overly optimistic. In this process, this essay has touched on some important issues regarding the property market in China, which, because of China’s increasing economical importance, has global implications. Although there is much doubt about the sustainability of China’s current growth model, it is clear that this situation needs to be closely monitored in the future.

Reference List

Primary Sources

Rapoza, K 2011, ‘Why China’s housing bubble is different’, Forbes, viewed 5 February 2014, <http://www.forbes.com/sites/kenrapoza/2011/04/22/why-chinas-property-bubble-is-different/>.

Rapoza, K 2013, ‘China’s non-bubble housing bubble’, Forbes, viewed 5 February 2014, <http://www.forbes.com/sites/kenrapoza/2013/03/11/chinas-non-bubble-housing-bubble/>.

Secondary Sources

Barkham, R 2012, Real Estate and Globalisation, John Wiley & Sons, Ltd, Chichester.

Chen, X & Funke, M 2013, ‘Real-Time Warning Signs of Emerging and Collapsing Chinese House Price Bubbles’, National Institute Economic Review, vol. 223, pp. 39-48.

Goodstadt, L 2011, Reluctant Regulators: How the West Created and How China Survived the Global Financial Crisis, Hong Kong University Press, Hong Kong.

Hou, J 2011, ‘The Role of the State in Structural Transition and Economic Crisis’, The Social Science Journal, vol. 48, pp. 01-12.

Shen, L 2012, ‘Are House Prices too high in China?’, China Economic Review, vol. 23, pp. 1206-1210.

Smullen, J & Hand, N 2005, Oxford Dictionary of Finance & Banking, Oxford University Press, Oxford.

Wu, J, Gyourko, J, & Deng, Y 2012, ‘Evaluating Conditions in Major Chinese Housing Markets’, Regional and Urban Economics, vol. 42,  pp. 531-543.

Xu, X, E & Chen, T 2012, ’The Effect of Monetary Policy on Real Estate Price Growth in China’, Pacific-Basin Finance Journal, vol. 20, pp. 62-77.

Zhang, M & Rasiah, R 2014, ‘Institutional Change and State-Owned Enterprises in China’s Urban Housing Market’, Habitat International, vol. 41, pp. 58-68.