Loose US monetary policy has had its echoes all around the world. The US dollar, once thought to be “as good as gold”, has now been shown be nothing of the kind. Gold bugs the world over have been proven right. Countries scattered all over the world have either dollarised, or run very tight pegs. In either case, this has meant largely adopting US monetary policy in countries as far flung as humble Ecuador (dollarised in 2002 following its own runaway inflationary disaster, which resulted in the emigration of 10% of the population) to the collection of Asian nations, China, Hong Kong, Malaysia, Taiwan, Indonesia, all of whom adopt some sort of peg to the US dollar. Without exception, each of these countries has experienced extreme property appreciation these last two years.
This documentary explores the Chinese experience.
The mechanism through which expansionary policies are communicated through China appear to follow the following pattern:
- Central government requires GDP growth/employment creation and so instructs the state-owned banks to lend.
- State-owned banks lend principally to state-owned companies as these are good credit-risks, backed – as they are – by the state.
- State-owned companies buy land from local governments for property development in accordance with a master plan for development of a new business district.
- Local governments spend the proceeds on who-knows-what…here the trail goes cold. However, land sales actually account for the vast majority of local governments’ income so one can be sure that they put plenty of pressure back on the central government to keep the cash coming! Once the local government has it, this cash leaks out into the real economy somehow. Some of it presumably gets recycled into new deposits on property.
- Individuals buy units using mortgages from private and state-owned banks, often using equity released from the appreciation of property bought in previous transactions. Ultra-low interest rates, fixed by the central bank, help them keep up with their repayments.
In short, this process is little different in essence from the credit-fuel property booms that have occurred the world over and it will have at its heart cronyism, corruption and waste.
The stories of the booms and busts of each country carry a different twist as the setup of institutions in each country is different, with the common flavour being that of credit growth aided by monetary expansion.
To the requisite ingredients of loose money and credit growth, China has added the explosive ingredient of it being a command economy, which has served to amplify the misallocation of capital. The results are spectacular. The most populous nation on earth does most things on an epic scale, and property boom and bust is seemingly no exception. Enjoy.