from Follow the Money

Read Richard McGregor’s FT article on China

February 28, 2006

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I follow the data coming out of China pretty closely, at least for someone whose linguistic limitations crimp any long-term ambitions to be a professional China Watcher.    

Not every article on China impresses me.  But Richard McGregor's big FT piece certainly did.   If you cannot read it in its entirety, read Mark Thoma's excerpts.  It offers a window into the political debates raging inside China - and the political future of Central Bank governor Zhou.

Is Hu a reformer seeking to correct some of the inequities that arose during the initial phase of market reforms?  Or a defender of status quo, unwilling to take the difficult decisions required to really loosen the state's grip over the commanding heights of the Chinese economy?  Is Zhou pushing financial sector reforms (including foreign participation in the financial system) faster than the political traffic will bear?  Is China's economic miracle poised to continue, or set to unravel?

I certainly don't know - but I felt I got a better sense of  the debate in Beijing (and Shanghai) after reading McGregor's article. 

McGregor also highlights that - depending on your point of view - you can tell a story about China based on how far China has moved toward the market, or based on how much remains to be done to make China into a real market economy.

A couple of other points jumped out at me.

First, the vast gulf between urban and rural land prices in China.   This is not just a Chinese phenomenon.   A modest New York apartment goes for about as much as a section of land in central Kansas - and, as in China, the price discrepancy is growing, not shrinking. 

But in China, urban residents can own their apartments, while rural peasants cannot own their own land.  That means urban residents can benefit from capital gains as prices rise, while rural peasants cannot - and there are often big gains from reclassifying how land on the urban fringe can be used.  Gains that often go the local party leadership.

In rural areas the most sensitive issue, and one the government so far has dared not touch, also revolves around giving greater play to the market, with all the risk that entails. City residents can now buy and sell their homes but rural land remains under collective ownership and cannot be traded by farmers.

As a result, land in rural areas has less than 10 per cent of the value of urban land, according to a report by Zhou Tianyong, of the Central PartySchool in Beijing. "And that is a conservative estimate," he says. Other Chinese researchers say that rural land can be worth as little as 2 per cent of the value of urban land.

Such differentials offer an irresistible financial incentive to corrupt officials to take rural land, reclassify it and sell it on for homes or factories. The central government understands this but fears that allowing farmers to sell their small lots would leave tens of millions of them without land, which has in effect been their safety net. Such a reform, Beijing fears, could lead to discontent and insurrection.

The mass appropriation of land and assets, in both cities and in the countryside, by officials or businessmen with government connections in the last decade has also been the main factor in a backlash against privatisation in the last year.

Minxin Pei notes that nearly half the richest Chinese in Forbes 2004 list were real estate developers.  If his numbers of the distribution of land rents are right -- "peasants regularly earn less than 5% of the value of their land while developers pocket 60%, with the remainder going to local government coffers" -- it isn't hard to see why many in China feel they are not getting their fair share of the gains of China's success.

The other point that jumped out at me is not at all related to land tenure -- the development of a market for short-term corporate securities.  I had previously wondered why firms were issuing short-term paper to finance long-term investments.  And McGregor puts forward a rather plausible answer - a power struggle between the PBoC and the planning ministry (regulatory arbitrage).

The PBoC also wrested control of corporate bonds from the chief planning agency, which had allowed the market to wither because it was unwilling to bear the risk of approving issuances. The central bank cleverly got around the planning agency by establishing a market for short-term notes that could be rolled over every 12 months, making them bonds by any other name.

I don't know as much about this market as I would like.   It certainly seems to be growing fast - and absorbing some of the extra liquidity in the banking system created by the central bank's limits on direct lending.   Firms presumably like it because short-term notes pay lower interest rates than bank loans.    

But part of me also wonders whether the development of the corporate paper market is undermining the central bank's efforts to contain investment growth, even as it promotes financial market development.   Limits on lending growth haven't let to any fall off in investment growth - and this may be one reason why.  I don't think the banking system's holdings of these securities count as loans (I am not sure though) in the data, yet growing issuance of these kinds of notes clearly provides a potential source of relatively cheap funding for Chinese firms.    Of course, the increase in the stock of corporate paper ($25b) is still small relative to the increase in banking lending ($304b, data from Stephen Green)

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