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
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
"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
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
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
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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