Red capitalism, or market communism?

Red capitalism, or market communism?

By Sally Wang
Asia Times, Sept, 27, 2008

SHENZHEN - Late Chinese paramount leader Deng Xiaoping said in the early 1990s, "There is market in a planning economy, and there is planning in a market economy." He made the comment to silence party ideologues about to launch a nationwide debate over whether his market-economic reforms were in accord with socialism.

Deng simply told the nation that there is no absolute demarcation between socialism and capitalism and that they should not waste time in searching for one. But when Deng made the comment it is unlikely to have occurred to him that he was predicting events now unfolding.

China over the past 30 years has concentrated on denationalization to turn its socialist command economy into a free-market economy. In this drive, the government in Beijing obviously has in mind as a model the Western free-market economic system, of which the United States is the leader. China has for 30 years sought to adapt to international standards, which are largely set by the West, again led by the US, and its modernization ambition is to catch up with major capitalist economies, and with the US as the ultimate goal.

But while China is moving closer to a free-market economy, the US now has to take more and more "socialist" measures to save its collapsing financial markets. For some Chinese economists, Washington's bailing out of the two mortgage finance companies Fannie Mae and Freddie Mac, and American International Group (AIG) is a move of "nationalization". And the George W Bush administration's proposed US$700 billion rescue package is a further step in this direction.

"Washington's moves serve as an eye-opener to free-economy believers in China who now realize that even in a market economy, the government cannot always keep its hands off the economy, however market-oriented it may be," an economy researcher with the Chinese Academy of Social Sciences (CASS) said.

on the other hand, the US moves seem to give those who have been demanding the Chinese government 'rescue' the plunging property and stock markets a 'justification' or excuse to cry louder, regardless of the different situations between China and the US."

The bailout panic measures in the US, led by Treasury Secretary Henry Paulson, come a mere 18 months after Paulson warned that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.

"An open, competitive and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,'' Paulson told an audience at the Shanghai Futures Exchange, Bloomberg reported.

Now the Chinese government is facing demands from within to take steps to help its own property market.

According to National Business Daily on September 24, the semi-governmental China Real Estate Association has submitted a report to the State Council, or cabinet, proposing the government ease its tightening policy on the property market. Deputy president of the association, Zhu Yizhong, said the proposals included allowing local governments to "rescue" their real estate markets as well as to lower the housing transaction tax.

The association in effect wants Beijing to "legalize" moves that have been taken by some local governments to halt a plunge in housing prices in their localities, including to financially subsidize house buyers, the CASS economist said.

For example, a policy issued on September 4 in Xian, the capital of northern Shaanxi province, stated that buyers of apartments smaller than 90 square meters, or second-hand apartments under 144 square meters from September 4 to December 31, 2009, will receive a city government subsidy of 0.5% to 1.5% of the total price. To encourage developers to start construction of housing projects, the government also promises to exempt some levies.

Many other cities, including Xiamen, Nanjing, Changsha and Chengdu, have launched similar policies this year to boost the local slack real estate markets.

The municipal government of Xiamen in Fujian province has announced that a purchaser of an apartment of 70 to 80 square meters will be granted Xiamen hukou or permanent residency for up to two persons.

These cities have launched the rescue measures not because there are sharp drops in housing prices but because of a plunge in housing sales.

Housing prices in 35 cities gained 8% year-on-year in the second quarter, down from 9.8% in the January to March period, according to the National Development and Reform Commission and National Bureau of Statistics, suggesting Beijing's efforts last year to rein in borrowing and prices is having an effect.

In Xian, housing prices rose 20.8% in the second quarter, but transactions dropped 20% by floor area. House prices in Xiamen were the third-highest among the 35 cities - at about 7,000 yuan (US$1,000) per square meter on average. But sales declined 64%.
Hence, their rescue measures have aroused fierce criticism. Critics say the city governments are defying Beijing's policy just to sustain housing prices at a high level so they can reap more funds from land sales, which have become an increasingly important source of their fiscal incomes.

An online survey by Xinhua.net indicated that almost 90% of the interviewees believed the local government subsidy policies to be unjustifiable.

In defense, Xiao Zhengguang, the vice secretary general of the Xian municipal government, said the government had the responsibility to solve problems encountered by the real estate industry as it is a pillar industry of the national economy.

Many analysts say that the intention behind the local governments' policies to boost housing sales was also to boost growth of local gross domestic product, in addition to increasing their fiscal incomes.

"The situation is very different from that in the US. House prices in China are still high, and [private housing] is not affordable to average wage earners. Besides, there has not seen sharp housing price declines that could threaten the financial industry. So there is no reason for government intervention," the CASS economist said.

"These city governments and real estate developers are playing games with Beijing to pursue their own interests. Leaders of these city governments must be disciplined as their policies go against Beijing."

Li Daokui, director of China and world economy research center with Tsinghwa University, said it is unfair to use taxpayer's money to subsidize housing buyers. He also questioned the local measures to help estate developers. "By giving subsidies to real estate developers, they should reconsider to demand them to cut housing prices."

Li suggests that the subsidy should be given to buyers of their first apartment, instead of all buyers. First home buyers are people who really need houses, he said.

Chen Hewu, economy researcher with the China Certification Center, criticized the local government of propping up the real estate market by giving subsidies when the housing prices are still intolerably high.

The internationally recognized reasonable housing price is three to six times a person's annual income. In China, the ratio of housing price to average wage earners' annual income is from 15 to 20 or even higher.

Sally Wang is a journalist based in Shenzhen, China