Mao Yushi: China’s property bubble must burst

Back in April 2011 Chinese economist Mao Yushi (茅于轼) set off a firestorm with a strongly worded criticism of Mao Zedong (毛泽东) posted to Caixin Online. This week Mao Yushi has again raised eyebrows, this time with a darkly frank assessment of China’s property market in an interview with Guangdong’s Southern Metropolis Daily.

In the interview, Mao Yushi argues that one key reason behind rising property prices in China in recent years has been a lack of good investment alternatives for China’s rich, fueling a boom in properties used largely for investment purposes but unaffordable for the vast majority of Chinese.

Citing a high rate of vacancy in Chinese properties (“possibly as high as 50 percent”), Mao suggests China’s property bubble must collapse, with properties losing at lease 50 percent of their value.


[ABOVE: Properties in Guangzhou’s Xian Village are vacated to make way for new property developments. The sign encourages local villagers to reach settlements on compensation for demolished property as early as possible. Photo by David Bandurski]

“Is there no remedy?” the Southern Metropolis Daily reporter asks towards the end of the interview. Mao Yushi answers by suggesting a tax on vacant properties, which he says might encourage a dramatic drop in rental prices and make apartments available to migrant workers. [Readers can click here to follow the conversation about Mao Yushi’s arguments on Sina Weibo.]

No Medicine Can Cure [China’s] Property Market
Southern Metropolis Daily
February 27, 2012

Southern Metropolis Daily: Recently, a number of projects in Lucheng (绿城) in Zhejiang province have been sold, exposing the existential crisis facing privately-run property enterprises. How do you view this phenomenon?

Mao Yushi: How can property enterprises make so much money? The direct reason is that property prices keep going up. Property buyers make money, and property sellers make money too.

Beginning in the second half of last year, you can already see the situation (in the market) changing. But many property developers haven’t yet seen these changes. So now properties are difficult to sell, money can’t be borrowed, and so (they) see the capital chain being broken.

Southern Metropolis Daily: Why is it that this phenomenon is quite common among private enterprises, but the situation at state-run property enterprises is somewhat better?

Mao Yushi: The difference between state-run and privately-run enterprises is in the ability to access money. But the larger climate dictates that the property sector faces huge dangers, whether state-run or privately-run. I said this the year before last. My friends in the property sector don’t like to hear me say it. They say why don’t you help us out. I say, if I help you this does you harm. Unfortunately, very few people understand this.

Southern Metropolis Daily: Many privately-run enterprises have been influenced heavily by macro-adjustments. Where is the development bottleneck here?

Mao Yushi: It’s about financing.

Southern Metropolis Daily: So because they have no cash, these private enterprises face a shrinking space?

Mao Yushi: The major banks don’t service small and medium-sized enterprises. This is the same around the world. The United States has more than 8,000 banks, the vast majority of these small banks. That is why there is no serious financing problem for small and medium-sized businesses in the U.S.

Southern Metropolis Daily: Where is the future space for development for privately-run enterprises in China?

Mao Yushi: If the problem of financing is not resolved there a large space for development doesn’t exist. The biggest source of financing for private enterprises right now is private lending (民间借贷). Now the government plans to chop this [source of financing] off, and the public response has been loud. Because if private lending is not available, this will further strengthen the monopoly of financing by state enterprises.

Southern Metropolis Daily: [Economist] Lang Xianping has said before that once private property developers are out of the picture, property prices will get even higher. What do you think about that view?

Mao Yushi: The problem for small and medium-sized enterprises is about financing, and the problem of financing doesn’t have much to do with property prices.

The Property Bubble Will Burst Sooner or Later

Southern Metropolis Daily: Some people already think that the property market [in China] has already entered an era without a sense of direction, and that the inability to come to a consensus about the property market is the fundamental cause of chaos in the market. Do you support that view?

Mao Yushi: No. I think there are a number of reasons why the property sector has become what we see today. One reason is that income distribution in our country is uneven, and the gap between rich and poor is too pronounced. Even if prices go up further, the rich can afford it, and so they don’t care how high prices go. Secondly, the rich have no good channels for investment. If there were good channels for investment, they would no longer go and buy property. Third, there are government controls on land. The government’s regulations concerning a bottom line (红线) for arable land protection at 180,000 mu [or 12,000 hectares] are extremely misguided. Land [availability] is the reason property prices are expensive, and insufficient supply (of land) drives property prices up.

Southern Metropolis Daily: On the one hand, property prices have risen significantly. On the other hand, the rate of empty properties in many areas is quite high.

Mao Yushi: In fact, the (the reason driving property price increases) isn’t because there is so much demand from people. Right now [as you say] many properties are empty, but I think in some cases properties have been empty for more than a decade.

Southern Metropolis Daily: You’ve said before that the greatest risk to China’s economy this year is the property market. Where specifically do you see [this danger] emerging?

Mao Yushi: Many properties standing empty spells a bubble. In my view, the biggest risk for China’s economy this year and next is the bursting of the property bubble. China’s situation, I’m afraid, is unique in the world, because there are so many empty [residential] properties, no one living there. This is the biggest bubble [you can imagine]. A sea of properties, and no one living in them. This is a frightening (thing).

Southern Metropolis Daily: Do you think the property bubble will burst this year?

Mao Yushi: It’s hard to say, but it will burst sooner or later. How could it not burst? You would have to have people living in all of these properties for the [problem of] empty homes to be absorbed. Is that possible. I don’t think it’s possible. Well then, the only road possible is the bursting [of the bubble]. What does bursting mean? It means the steady fall of [residential] property prices.

Southern Metropolis Daily: How far do you think property prices will fall if the bubble bursts?

Mao Yushi: I think 30 percent is too little. Dropping 50 percent is more like it. Actually, 50 percent isn’t really that high. Three years ago, property prices in Beijing went down that much.

Southern Metropolis Daily: According to your thinking, empty properties give rise to a bubble. Well then, in your view, are residential properties by nature supposed to serve a residential function?

Mao Yushi: The ultimate purpose of residential property is that it be lived in.

Southern Metropolis Daily: The only function of homes is to be lived in, so if it’s not this function [they are serving], then we can say something has gone wrong with [the] property [market]?

Mao Yushi: That’s not the way to view this situation. In the property market there should be speculative property (投机房), but the ratio should not very high. Homes can sit empty. But I’ve heard friends in the property market say the rate [of empty properties] should stand around 8-10 percent. Right now, it’s not even 30 percent, but possibly as high as 50 percent. With so many empty properties, can trouble be avoided?

Government Intervention is No Match for the Power of the Market (市场威力)

Southern Metropolis Daily: But looking at the situation this year, it seems that in some regions, owing to restrictions on property purchasing or prices, prices on the property market have gone down?

Mao Yushi: Not necessarily. Right now, the fall in property prices isn’t necessarily due to price or purchasing restrictions. I think its that the whole macroeconomy has met with trouble. I wrote an article before in which I said that now that buying restrictions were over the (government) should rely on the market here on out. Once the bubble bursts, the government should rely on the market. You tell me, what is the use of restricting prices and purchasing?

Southern Metropolis Daily: You’re totally against price and purchasing restrictions?

Mao Yushi: Totally against them.

Southern Metropolis Daily: Ok, what about property taxes (房产税)?

Mao Yushi: I don’t support them either. I’m in support of high taxes on investment gains (投资收益)?

Southern Metropolis Daily: What’s wrong with places like Chongqing and Shanghai charging property taxes?

Mao Yushi: Limits on purchasing and property taxes are limits placed on people buying homes, and I think they’re no good. Property taxes are not a way of dealing with the market [as a whole], but rather should be a normal form of tax, an normal part of the operation of the real-estate market.

Southern Metropolis Daily: So everyone has misunderstood property taxes?

Mao Yushi: We should have property taxes, but they are not a tool to tackle high property prices . . .

Southern Metropolis Daily: On November 10 last year, Zhongshan [in Guangdong province] issued an order on price restriction (限价令) capping property prices at 5,800 yuan/square meter up to December 31, 2011. But after the new year, the cap was raised to 6,590 yuan/square meter.

Mao Yushi: This is completely without reason. Price caps are an even bigger mess than purchasing limits.

Southern Metropolis Daily: But home buyers really benefitted.

Mao Yushi: The most important is balance. This kind of forced price drop will cause unhappiness among developers, and what happens later when no one goes and develops properties?

Southern Metropolis Daily: In fact no clear official document was released for this price standard in Zhongshan. [The government] simply refused to register any property [for sale] that was above this price.

Mao Yushi: Regardless of whether or not there was a document, price limitations are wrong. This just suggests that the government doesn’t want to take responsibility as it carries out a wrong-headed policy. We have a Commodity Price Law by which prices are determined by the market and not interfered with by the government. How do they decide 6,590 yuan/square meter is suitable and not 6,600 yuan/square meter?

Southern Metropolis Daily: The government calculated it on the basis of GDP growth of 13.5 percent last year.

Mao Yushi: Hitching price limits up to GDP makes even less sense.

Southern Metropolis Daily: What if they were connected to average disposable incomes?

Mao Yushi: That makes no sense either. The government needs to have an understanding of economics. They shouldn’t manage so much, but should let the market freely make adjustments.

Southern Metropolis Daily: Do you encourage people to purchase property?

Mao Yushi: In the current market environment I don’t advise people to buy property. Seeing as prices (for property) will drop, what reason would there be in buying something whose price will go down?

Southern Metropolis Daily: But you’ve said before that the government should encourage people to buy property.

Mao Yushi: There’s nothing wrong with the government encouraging people to buy property. But the government needs to open up land supply, expand avenues for investment, etcetera, and not apply limitations on property purchasing to bring prices down.

Charging a Tax on Empty Properties Could Help Dilute the Property Bubble

Southern Metropolis Daily: So what do you think should be done about China’s economy this year? Will there be any loosening of adjustments for the property market?

Mao Yushi: On this, let me just say that government adjustments are of no use. They are negligible compared to market forces. What the government can do is open up investment opportunities, allowing those with money to put that money in investments rather than purchasing property. This is what the government should do first and foremost. But it’s already late. In my view, the bursting of the property bubble is something that cannot be avoided.

Southern Metropolis Daily: It must burst? Is there no remedy?

Mao Yushi: (Things for several seconds) Let me offer one suggestion. Charge a tax on empty properties, and the result will be that rental prices drop dramatically. Then workers from outside the city could afford to rent apartments. If that were done I think it might have some benefit for the property market.

Of course, some people say this would be difficult to do, because it’s difficult to tell whether a property is vacant. But in my view, even if it’s very difficult, even if the costs of doing it are high, it is something that really needs doing, because the income would be very high. . . I think it could be done.

So a property that before could be rented for 2,000 could be rented for 1,000 [a month]. But seen from another angle, (this suggestion) does somewhat interfere with personal freedoms. But I think this is a matter of no alternative, otherwise the losses later will be even larger. When the property bubble bursts down the road, the properties will be worth even less.

Southern Metropolis Daily: Isn’t this suggestion of yours also a form of government regulation of the market?

Mao Yushi: It amounts to interfering with the market, but why is there a need to interfere? Because there is already a bubble. What use is restricting purchases? The purpose of [this] adjustment [I’m suggesting] is allowing people to live in these empty properties.

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