Comments on Alan Kohler "A housing bubble? You bewdy!" 18/09/2013, http://www.businessspectator.com.au/article/2013/9/18/economy/housing-bubble-you-bewdy
Alan, you listed two reasons, "a lack of spending on infrastructure by state governments and planning restrictions by local councils", for "why is there a persistent shortage of housing in Australia when it’s the 3rd least densely populated nation on earth. (Mongolia and Western Sahara are less dense)."
While they are correct, there may be other more important reasons. For example, the relative price of building a house in Australia may be much higher, due to high labour and building materials costs here. This reflects a general pattern that non-traded goods and services have a much higher price relative to trade goods and services in Australia.
Capital costs are generally higher in Australia as, much higher than in the US. This is because it is an small, growing and capital importing country. For example, it is probably common for the official interest rates in Australia to be more than 2 percentage point higher than in the US.
Further, state and local governments rely on either land tax or rates as a source of revenue, so if land value is lower, their revenue may be lower too. From that point of view, they have incentives to keep land value high, contributing to higher housing prices. This is particularly true for local governments given that rates are one of the main sources of revenue for them.
On the demand side, Australia's geographical location close to Asia where there are billions of people with much higher population densities and relatively scarce land in conjunction with Australia's fairly open policy on foreign buyers of real estate properties, mean external demand can be a significant factor in driving the house price higher than it would otherwise be.
In fact, I would argue that this is a very important fact behind Australia's much higher ratio of house price to income and has been overlooked by many economists and analysts when they say that Australia's housing price is too high and there is a significant bubble in the housing market in Australia.
If using housing price to income ratio as a definition for house market bubble, then it is true that there is a housing market bubble in Australia and indeed a quite big one. However, it can be argued that such bubble may not be as easily to burst as in other industrialised countries because of the external demand factor.
This is likely to be a unique feature of the Australia housing market.
2013-09-18
Complexity demands more monetary policy tools
Comments on Stephen Koukoulas "House price bull heaven", 18/09/2013, http://www.businessspectator.com.au/article/2013/9/18/property/house-price-bull-heaven
Leaving how the housing market price in Australia will develop and how the RBA will deal with that aside, it should be acknowledged that the current monetary policy tool is not enough to deal with both the broad economy and the asset markets prices with only uniform official interest rates applied to all.
The RBNZ policy development regarding housing lending as Koukoulas mentioned (New Zealand’s bold move against the housing bubble) partly mirrored China's approach and has some merits, though the approach of restricting the LVR is not an efficient economic policy because it lacks clear price signals for both lenders and borrowers. In another word, it is not really a market approach but a administrative approach.
A better policy approach is a market based on price, that is, by introducing and applying differential 'official' rates that could be applied when dealing with different situations such as the broad economy and the housing market.
That itself may raise some costs, but that may be a price that needs to be paid in dealing with complex situations. Otherwise, you may continue to have the sort of risks of the GFC to reoccur. Further, it is not too dissimilar to fiscal policies that have its own structural content.
Leaving how the housing market price in Australia will develop and how the RBA will deal with that aside, it should be acknowledged that the current monetary policy tool is not enough to deal with both the broad economy and the asset markets prices with only uniform official interest rates applied to all.
The RBNZ policy development regarding housing lending as Koukoulas mentioned (New Zealand’s bold move against the housing bubble) partly mirrored China's approach and has some merits, though the approach of restricting the LVR is not an efficient economic policy because it lacks clear price signals for both lenders and borrowers. In another word, it is not really a market approach but a administrative approach.
A better policy approach is a market based on price, that is, by introducing and applying differential 'official' rates that could be applied when dealing with different situations such as the broad economy and the housing market.
That itself may raise some costs, but that may be a price that needs to be paid in dealing with complex situations. Otherwise, you may continue to have the sort of risks of the GFC to reoccur. Further, it is not too dissimilar to fiscal policies that have its own structural content.
2013-09-17
China and central Asia
Comments on Laurie Pearcey "Xi Jinping’s New Silk Road: Chinese foreign policy, energy security and ideology", 17/09/2013, https://theconversation.com/xi-jinpings-new-silk-road-chinese-foreign-policy-energy-security-and-ideology-17994
Given the size and continued rapid growth of China's economy and the current and expected energy mix in the world economy, China will have stronger interests in the middle east for its energy security. This implies that it will not only increase its investment in many ways in the region, but also extend its strategic consideration for diversification of its energy sources, such as from Russia and possibly from some central Asian countries, as well as build alternative oil transport such as pipelines running through Pakistan and Burma.
As China increase its navy power, the importance of middle east oil to its energy and security means it will probably increase its military presence along its ocean oil transport including up to the middle east.
Central Asia plays an important economic as well as security role in China's new silk road strategy. As China expand its navy power to protect its ocean transports, it is essential to have a secure backyard in the west inland borders, particularly along its restive Xijiang region.
Given the size and continued rapid growth of China's economy and the current and expected energy mix in the world economy, China will have stronger interests in the middle east for its energy security. This implies that it will not only increase its investment in many ways in the region, but also extend its strategic consideration for diversification of its energy sources, such as from Russia and possibly from some central Asian countries, as well as build alternative oil transport such as pipelines running through Pakistan and Burma.
As China increase its navy power, the importance of middle east oil to its energy and security means it will probably increase its military presence along its ocean oil transport including up to the middle east.
Central Asia plays an important economic as well as security role in China's new silk road strategy. As China expand its navy power to protect its ocean transports, it is essential to have a secure backyard in the west inland borders, particularly along its restive Xijiang region.
Reforming China's monetary system
Comments on Sara Hsu and Andrew Collier "China’s shadow banking tug of war", 17/09/2013, http://www.eastasiaforum.org/2013/09/16/chinas-shadow-banking-tug-of-war/
Shadow banking as well as the prevalence of ‘illegal fundraising’ in China reflects the severe deficiency of its monetary policy and management system. Given the role of money and credits in the economy, reforming the banking and finance system and its monetary management system in China should be a top priority.
From monetary policy point of view, a number of areas should be reformed. Firstly, monetary authority should not control both deposit and lending rates and should adopt the general practice of most central banks in the industralised countries.
Secondly, neither the government nor the central bank should force any banks to lend state owned entities at lower than the market rates to distort the banking system and monetary policy. This not will create a fair competition between the SOEs and other entities in the market place but also reduce the risks for banks.
Thirdly, China needs to transform the shadow banking into the formal banking and finance system and allow more entries of the private sector into the banking and finance system if they can meet regulation requirement.
Once the previous step is taken, it should strengthen its management of the banking and finance sector.
Reforming its banking and finance system will also have the added benefits of reducing corruption and organised crimes such as money laundering.
A better functioning banking system in China will also reduce the need for the Chinese people to physically store and carry a lot of cash.
The most important benefit is to allow much more efficient allocation of economic resources.
Shadow banking as well as the prevalence of ‘illegal fundraising’ in China reflects the severe deficiency of its monetary policy and management system. Given the role of money and credits in the economy, reforming the banking and finance system and its monetary management system in China should be a top priority.
From monetary policy point of view, a number of areas should be reformed. Firstly, monetary authority should not control both deposit and lending rates and should adopt the general practice of most central banks in the industralised countries.
Secondly, neither the government nor the central bank should force any banks to lend state owned entities at lower than the market rates to distort the banking system and monetary policy. This not will create a fair competition between the SOEs and other entities in the market place but also reduce the risks for banks.
Thirdly, China needs to transform the shadow banking into the formal banking and finance system and allow more entries of the private sector into the banking and finance system if they can meet regulation requirement.
Once the previous step is taken, it should strengthen its management of the banking and finance sector.
Reforming its banking and finance system will also have the added benefits of reducing corruption and organised crimes such as money laundering.
A better functioning banking system in China will also reduce the need for the Chinese people to physically store and carry a lot of cash.
The most important benefit is to allow much more efficient allocation of economic resources.
2013-09-15
Pettis is wrong about China's growth for the next decade
Comments on Pettis "Why China faces four per cent growth: Pt. 2", 14/09/2013, http://www.businessspectator.com.au/article/2013/9/13/china/why-china-faces-four-cent-growth-pt-2
I made a comment on Friday and now Pettis' second half is out so I would make a little more.
Firstly, are the two examples of painful adjustment that Pettis used, namely the US in the 1930s and Japan in the 1990s applicable to China at all? The 1930s was or was in the wake of the great depression world wide but particularly in the US following the stock market crash in 1929 and the 1990s for Japan were the first of Japan's two lost decades following the burst of its financial bubbles. Further, both countries at the respective times were at world economic frontier with one of the highest income in the world. Is China in those situations? No, any person with a common sense would understand China isn't. China is only probably about 20% of the per capita income of that of either the US or Japan. China may have some bubbles, but definitely not as severe as to hurt its real economy. There is plenty room for positive growth and the degree of uncertainties on its growth is not as high as those in the economic frontier given the room to further catch up. By any measure, China would not allow bubbles to burst to such a damage degree.
Secondly, as long as China's saving rate is high to sustain its investment and net export, there is no need to artificially to adjust its domestic consumption at a damaging speed. Its financial market and hosing market are unlikely to depress its economy, given its huge foreign reserves and high savings.
The argument of a decade low growth of 3-4% for China is fanciful and delusional to the extreme.
All the scenarios Pettis listed in the table is real growth rate and no inflation is included. In all likelihood, inflation in China is likely to be between 3-4% a year on average for the next decade or so, as indicated by the current 3.6% target for a real GDP growth target of 7.5% for this year.
If inflation is included I would assume that China can maintain 8-9% real GDP growth that means nominal growth will be around 12-13% or more higher. For a nominal growth of 12% a year, according to the Pettis table (by extension, roughly 2% higher for all variables), the investment growth can be as high as 9-10.5% a year and consumption growth 16-18%.
Would be that healthy economically? I don't see a problem with that. Of course, there is no need to adjust between investment and saving/consumption as rapidly as Pettis argues and a longer adjustment, possibly 20 years or more is more likely given that consumption growth is that high and people would still have enough incentives to maintain high savings. Most people would be happy with that outcome.
I made a comment on Friday and now Pettis' second half is out so I would make a little more.
Firstly, are the two examples of painful adjustment that Pettis used, namely the US in the 1930s and Japan in the 1990s applicable to China at all? The 1930s was or was in the wake of the great depression world wide but particularly in the US following the stock market crash in 1929 and the 1990s for Japan were the first of Japan's two lost decades following the burst of its financial bubbles. Further, both countries at the respective times were at world economic frontier with one of the highest income in the world. Is China in those situations? No, any person with a common sense would understand China isn't. China is only probably about 20% of the per capita income of that of either the US or Japan. China may have some bubbles, but definitely not as severe as to hurt its real economy. There is plenty room for positive growth and the degree of uncertainties on its growth is not as high as those in the economic frontier given the room to further catch up. By any measure, China would not allow bubbles to burst to such a damage degree.
Secondly, as long as China's saving rate is high to sustain its investment and net export, there is no need to artificially to adjust its domestic consumption at a damaging speed. Its financial market and hosing market are unlikely to depress its economy, given its huge foreign reserves and high savings.
Thirdly, Pettis has a automatic adjustment factor, that is, the net export and government consumption. Contrary to Pettis assumption, this factor can accommodate a higher savings/low consumption and high investment if and when needed.
So, Pettis is wrong in his conclusion that China is facing a decade of 3-4% growth.
Further, Pettis got the cause effect wrong. The painful adjustments in the US in the 1930s and in Japan in the 1990s were the results of low economic growth. During the relevant periods, their investments fell and their consumptions didn't grow. It's not the adjustments that caused low growths. Rather, it's the low growth that caused painful adjustments.
China won't have that painful adjustment and as a result there won't be automatic low growth flowing from that painful adjustment. And if there is no low growth, there won't be painful adjustment in consumption and investment.
China's new leadership government has already stated that it will sustain reasonable growth in the process of economic adjustment. It seems its limit of low growth is likely to 7.5% and it is unlikely to allow growth below that for any long period.
The argument of a decade low growth of 3-4% for China is fanciful and delusional to the extreme.
All the scenarios Pettis listed in the table is real growth rate and no inflation is included. In all likelihood, inflation in China is likely to be between 3-4% a year on average for the next decade or so, as indicated by the current 3.6% target for a real GDP growth target of 7.5% for this year.
If inflation is included I would assume that China can maintain 8-9% real GDP growth that means nominal growth will be around 12-13% or more higher. For a nominal growth of 12% a year, according to the Pettis table (by extension, roughly 2% higher for all variables), the investment growth can be as high as 9-10.5% a year and consumption growth 16-18%.
Would be that healthy economically? I don't see a problem with that. Of course, there is no need to adjust between investment and saving/consumption as rapidly as Pettis argues and a longer adjustment, possibly 20 years or more is more likely given that consumption growth is that high and people would still have enough incentives to maintain high savings. Most people would be happy with that outcome.
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