http://www.atimes.com/atimes/China_Business/JI27Cb01.html

 Sep 27, 2008 

Red capitalism, or market communism? 
By Sally Wang 

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 

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