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G20 looks to Beijing to drive global growth

July 12, 2010

By Geoff Dyer in Beijing | Financial Times

Published: July 11 2010 16:54 | Last updated: July 11 2010 16:54

A girl plays on a Beijing back road on Sunday. China has announced a big push to build public housing, including flats that can be rented by low-income families

The G20 appears to be placing a large bet on China’s policymakers. At their summit last month, one developed country after another, bar the US, said they would cut fiscal deficits.

If these economies all decide to reduce their budget deficits, what will drive global growth?” asked Simon Johnson, the former IMF chief economist. “The answer in Toronto was obvious: China.”

As a result, there will be unusually keen interest in China’s second-quarter growth figures, which are expected on Thursday.

China’s economy needs to slow from the turbocharged growth in the second half of last year and first quarter of this, which was fuelled by a huge increase in bank lending. But the second-quarter figures will be one of the early signs of whether China can pull off a measured cooling or whether the economy will slump when stimulus is taken away.

The Chinese economy is going through two delicate transitions. Worried about overheating, Beijing has applied the brakes in the two sectors that helped propel the recovery from the financial crisis last year, ordering a clampdown on property speculation and limiting lending to local government infrastructure projects.

At the same time, it is trying to find a growth model that relies less on the 20 per cent-plus increases in exports that it enjoyed for most of the past decade.

“The economy is not facing a hard landing but the current slowdown is leading China into growth below 10 per cent in the years ahead,” Mark Williams at Capital Economics says.

One of the keys to whether China will avoid an abrupt slowdown is the performance of the property sector. Since the introduction of policies to limit speculation in mid-April, the market has almost come to a standstill. Standard Chartered reports that sales are down 60 per cent in 14 big cities.

Although house prices have yet to fall much the bank estimates that they will drop 10-20 per cent in most cities and 20-30 per cent in Shanghai, Beijing and Shenzhen, which had the bubbliest markets. Others are even more pessimistic. Yi Xianrong, an economist at the Chinese Academy of Social Sciences (Cass), estimates that there are 64.5m empty flats and houses in China, many of them bought by speculators – the reflection of “an outsize property bubble”, he says in an article in People’s Daily last week.

If falling prices cause a building slump, it will have a big impact on the economy. However, Beijing has a fallback plan. Facing mounting discontent at high house prices, it has announced a huge push to build public housing, including flats that can be rented by low-income families. Local government officials are under heavy pressure to comply. The central Chinese municipality of Chongqing has announced plans to build 10m square metres of social housing a year – equivalent to more than a third of its residential construction in 2009.

“In the future 30-40 per cent will live in low-income government housing,” says Huang Qifan, the mayor of Chongqing. “The government should provide more land and housing, otherwise property prices will be driven up. We should use the supply side school of thought from former president Ronald Reagan.”

Local governments have a poor record in meeting commitments to build social housing but if they come anywhere near the targets this time, it will take up some of the construction slack left by weak sales.

The authorities are also concerned at the possibility for widespread bad debts among local governments that borrowed heavily last year for infrastructure spending. Some economists believe the reduced growth in imports over the past two months is a sign that weaker lending to local governments is already starting to cause a big slowdown in investment – although the announcement last week that Beijing will double infrastructure spending in underdeveloped western regions over the next decade could provide some form of buffer.

Some critics are more relaxed about the outlook. Yu Yongding, another economist at Cass who issued a stark warning last year about the risks of overinvestment, says the situation is now more stable. “In the long run, we need to make deep reforms in the economic structure but in the short run the government has effectively used monetary policy to bring down investment,” he says.

Ultimately, if the economy does slow too quickly, the government has the choice of reversing course – making it easier again to get mortgages and to borrow for construction and infrastructure. The risk, though, will be creating an even bigger future bubble. Chinese investors might conclude that the authorities will never let house prices fall too far and plunge into property investing like never before. It is an option that Beijing will not use lightly.

Additional reporting by Patti Waldmeir, Chongqing

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