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Thursday, 16 October 2025

HOW THE CHINESE MONETARY SYSTEM REALLY WORKS (not the western propaganda)

 from : Warwick Powell substack.

Genuine expertise and understanding of the Chinese monetary system. NOT your usual Wall Street/Fed twaddle.

Next time: How this applies to the Housing Market in China, and why they neither overdid the boom (well, a little bit), but by golly they are really making sure a slow-down and reversal of prices is in place.

Credit Creation and the Fallacy of ‘Financial Repression’

Rethinking China's Economic Model: Critique of Hard and Soft Budget Constraints

Dr Warwick Powell

Sep 13, 2025

Context: the dominance of mainstream economic discourse across the western commentariat results in a one-dimensional perspective on China’s economic development, its institutions and policy focus. Such a perspective revolves around a series of core tropes including ideas of ‘balance’ (consumption v savings; households v enterprises), which are often misappropriated, misspecified and mobilised in normative terms that imply error or impending crisis. This short essay continues my own reflections on the shortcomings of mainstream framings, suggesting alternative interpretative frames. This essay addresses two fallacies: (1) the hard budget constraint fallacy; and (2) the household financial suppression myth. For a fuller piece on an alternative frame to understand China’s economic model and experience, check out my earlier essay ‘ China’s economic model revisited’.


In debates over China’s growth model, critics frequently invoke two lines of argument, amongst others: first, that Chinese enterprises, particularly state-owned ones, and local governments face soft budget constraints, allowing them to absorb inefficient capital and delay market discipline; and second, that households are financially repressed by deliberately low deposit interest rates, effectively subsidising enterprise borrowing and investment.

Both claims stem from a flawed understanding of how (fiat and fiduciary) monetary systems function, particularly in economies where bank credit plays the central role in financing investment. These critiques rely on a ‘loanable funds’ view of finance and overlook the endogenous, elastic and purposive nature of credit creation. As such, they mischaracterise how investment is financed, how household welfare is shaped, and how the state interacts with economic structure.

Let’s break these down.

Dogmas cloud the ability to see the world in alternative ways. The fallacies of mainstream economics rank is some of the most implacable of dogmas.

The Hard Budget Constraint Fallacy

The notion of soft budget constraints originates from János Kornai’s analysis of socialist economies, where enterprises were shielded from bankruptcy and inefficiency was perpetuated by guaranteed state support. Critics of China’s economy have reappropriated this idea, suggesting that state-linked firms, local governments and public investment vehicles behave irresponsibly due to expectations of a bailout. This line of thinking presumes a standard of ‘hard budget constraint’ grounded in the belief that financial resources are scarce, must be allocated efficiently, and are best governed by market prices including interest rates and bankruptcy risks.

This framing implicitly accepts the loanable funds model of finance, [the  plain wrong theory, see Steve Keen] where banks merely intermediate pre-existing savings from one sector (e.g., households) to another (e.g., enterprises). In such a model, allowing firms or governments to access credit without strict market discipline indeed risks waste and inflation, as scarce savings are misallocated. But this model bears little resemblance to how modern banking systems operate, especially in a financially sovereign state like China.

In fact, banks create credit ex nihilo; that is, new loans create new deposits (as opposed to the idea that it’s deposits that create loans). Fiduciary money is brought into existence via this mechanism. (It is removed from circulation via loan repayments.) Enterprise finance does not rely on a fixed pool of savings; rather, it is a forward-looking commitment of purchasing power - what I have called a claim on future embedded energy in the context of a thermodynamic model of value, production and circulation - enabled by banks and often steered by state priorities. The budget constraint on firms, therefore, is not an externally imposed scarcity but a function of productive potential and policy goals. A financially enabled enterprise is not ‘soft’ by default; its viability must be assessed in terms of real economy outcomes. Thus, we should be asking: does it generate output, incomes, employment or technological advance in ways that are positive in terms of Energy Return on Energy Invested? These are the real constraints and possibilities, not accounting-based financial flows.

Thus, the criticism that Chinese investment is excessive or unproductive because it escapes hard money budget logic overlooks that productive credit precedes income rather than follows it. The very purpose of investment-led growth is to expand capacity, generate employment and lift household incomes. The state’s role is not to impose artificial scarcity on capital but to direct credit - directly and indirectly - toward long-term structural transformation and the creation of energy surpluses. Judging this system by the standards of a capital-constrained firm in a market-clearing model is fundamentally misplaced.

 

Banks create credit ex nihilo. These are balance sheet and ledger adjustments, unconstrained by deposits. [If you don't know this, then you are one of the mass of deluded western economists! Wake up and learn the facts!]

Local Government Debt and Vertical Fiscal Imbalance

A frequently cited related concern in critiques of China’s development model is the rising debt levels of local governments, particularly through local government financing vehicles (LGFVs). These entities are often portrayed as extensions of the ‘soft budget constraint’ problem, undertaking investment with poor oversight, low accountability and the expectation of a bailout. However, this framing again misses the institutional and structural context in which such debt arises, and more importantly, misrepresents the role of credit in an economy undergoing large-scale transformation.

The proliferation of local government debt is best understood as a response to a persistent vertical fiscal imbalance: since the 1994 tax-sharing reforms, the central government has retained the majority of revenue-raising powers, while local governments remain responsible for the majority of infrastructure, social services and development expenditures. This creates a structural disconnect; localities are tasked with delivering high-growth, high-modernisation outcomes without sufficient fiscal capacity, which manifests as a case of institutional vertical fiscal imbalance. Put plainly, those with the bulk of the spending obligations don’t have the bulk of the revenue powers. In the absence of direct transfers or tax decentralisation, local governments have resorted to off-balance-sheet borrowing through LGFVs to fund essential investments in transport, housing, water and industrial zones.

This debt is not primarily speculative or wasteful, but rather a mechanism of state-led credit creation in a constrained fiscal environment. LGFV debt is often backed by land collateral, future revenues or implicit guarantees, and much of it has supported tangible capital formation. In this sense, it functions as a quasi-fiscal tool that blurs the boundary between public and private finance, enabling the mobilisation of long-term investment under conditions where orthodox fiscal tools fall short. In balance sheet terms, as has been recognised in IMF studies, Chinese local governments exhibit robust balance-sheet positions when assets are considered. For instance, LGFVs reported total assets at approximately 120% of GDP, versus liabilities around 75% of GDP by 2020. Other IMF studies that analyse the broader government balance sheet - encompassing financial assets and liabilities - also suggest that the net financial worth (assets minus liabilities) remains positive. Liabilities is one side of the ledger, assets is the other; and on these terms the asset base is solid. Liquidity challenges are related to the structure of taxing powers versus spending powers.

A further conceptual misstep in mainstream discussions of local government debt is the tendency to treat these obligations as if they were analogous to household or private firm liabilities, that is as debts owed by one entity to another in a hard contractual sense. In reality, what we are dealing with is a network of interlocking public-sector balance sheets, in which distinctions between central and local entities are administrative rather than economically absolute. There is no consolidated ‘sovereign’ balance sheet akin to a unified federal system with vertical fiscal transfers and debt pooling mechanisms. Instead, China’s fiscal structure functions as a decentralised developmental network, in which credit is deployed across tiers of government in pursuit of long-term national objectives.

Much of what is labelled ‘debt’ is, in substance, a form of internally generated and recycled claims within the public system - assets and liabilities that, while formally separated, are functionally coordinated and, in extremis, can be realigned through administrative and financial mechanisms. This means concerns about ‘default’ or ‘unsustainability’ are often misplaced: what matters is not the headline debt ratio, but the capacity of the system as a whole to generate and reallocate use value over time. Judging sub-sovereign public debt by private-sector metrics thus misrecognises the embedded nature of China’s fiscal-capital system and its evolutionary coordination logic.

Critically, I would argue, this is not a flaw in China’s financial system, but a feature of a development model where investment precedes returns (which I have discussed in more detail separately), and localities act as agents of national development goals. This is what Keyu Jin has called the “mayor’s economy”. The challenge is not the existence of such debt, but rather how to better align fiscal architecture with development responsibilities, improve transparency and accountability and ensure that credit continues to serve socially productive and sustainable ends.

In recent years, central authorities have undertaken a series of reforms aimed at managing these imbalances and improving the quality of local government financing. The introduction of a local government bond system in 2015 allowed for the gradual replacement of opaque LGFV debt with more transparent, on-budget municipal bonds, subject to clearer approval and oversight mechanisms. At the same time, bond swap programs were implemented to restructure high-cost or short-term LGFV liabilities into longer-term official debt, easing refinancing pressure. Furthermore, reforms to the central-local transfer system, including expanded equalisation transfers and performance-linked funding, have been designed to reduce over-reliance on land-based finance. Pilot programs for real estate tax in cities like Shanghai and Chongqing also reflect moves toward giving local governments more stable and endogenous revenue sources. These efforts aim not to eliminate local government debt per se, but to embed it within a more sustainable and rule-based fiscal framework, recognising that strategic local investment remains a critical pillar of China’s developmental statecraft.

The development-oriented framing of local government financing and debt has been confirmed by remarks from Minister Finance Lan Fu’an at a press conference on 12 September 2025. In response to a question from Reuters about local government debt financing and hidden debt, Lan observed:

“Debt reduction is a means to an end; development is the goal. We adhere to the dual approach of debt reduction and development, effectively promoting a virtuous cycle of economic development and debt management. First, it has enhanced local development momentum. Debt reduction has unblocked the capital chain, freeing up more financial resources, time, energy, and policy space for local governments to address bottlenecks, pain points, and difficulties in economic development. Second, it has accelerated the exit of financing platforms. By the end of June 2025, over 60% of financing platforms had exited, meaning that over 60% of these platforms' hidden debts had been eliminated, accelerating the reform and transformation of these platforms.”

Note that the progressive restructuring of local government debt structures has seen the dramatic reduction of financing platforms (the LGFVs) involved in the sector. It’s also worth pointing out that the financing of local governments is viewed through the lens of development, where debt management is largely about ensuring the freeing up of cash flows and other resources in the name of ongoing regional development.

The Household Financial Repression Myth [and this is where the supply of mortgage finance hits home, so to speak. It had been let rip a bit too much]

The second, related critique is that households are financially ‘oppressed’ by artificially low deposit interest rates. This argument holds that the Chinese financial system deliberately suppresses returns to savers so that cheap credit can be extended to enterprises, effectively transferring income from households to firms. Here again, the framing is drawn from an orthodox model in which the interest rate is an inter-temporal price, balancing savers’ patience and investors’ demand for funds. If deposit rates are low, households supposedly lose purchasing power, and consumption is suppressed relative to investment.

This is a textbook example of mistaking relative shares for absolute outcomes, and of ignoring the endogenous nature of money. First, real household incomes and consumption have risen dramatically over the past two decades. Most household income is derived from wages, self-employment and to a much lesser extent transfers, rather than from financial interest income. Even in developed economies, interest income constitutes a small share of household earnings.

Second, the logic of ‘financial repression’ assumes that households are net creditors, losing income through low deposit returns. But in a credit-driven system, household income is an outcome of investment and production, not a pre-existing fund diverted elsewhere. By financing enterprise investment in infrastructure, manufacturing and urbanisation, credit expansion has enabled employment growth and income expansion, which in turn support higher household consumption and savings in absolute terms. If enterprise credit leads to productive expansion, the result is a rising tide of income, not a zero-sum transfer. Chinese household incomes have increased over 700% in the past decade or so, in real terms. They continue to rise.

Moreover, the supposed link between deposit rates and loan rates is overstated. Banks do not need prior deposits to lend; they lend first and in doing so, create money. The deposit rate does not determine the cost of enterprise capital in any strict sense, because deposit rates don’t function as some inter-temporal preferences governing mechanism.

Investment as an autonomous demand driver spurs real income growth, which underpins consumption and further investment.

Understanding the Structural Logic of Investment-Led Growth

The deeper issue here is that both the hard / soft budget debate and the financial repression narrative reflect a misunderstanding of how capital accumulation and circulation occurs. In systems like China’s, where financial systems are coordinated with national development goals, the role of money and banks is not to passively intermediate between savers and investors (which is a neoclassical economics myth in any case), but is instead an instrument of public policy and structural transformation.

The constraints that matter are not financial bookkeeping entries but real economy constraints: energy availability, human resource capability, technological capacity, ecological sustainability and social stability. Investment in infrastructure, industrial upgrading and regional integration is not ‘soft’ simply because its returns are indirect or long-term. Nor is household welfare undermined because deposits yield low interest if real wages, employment and consumption are rising.

From a thermodynamic and ecological perspective, as noted by critics of the diminishing returns narrative, investment is always necessary to manage entropy, maintain systemic resilience and upgrade energy efficiency. [New (to me) ideas here, but Steve Keen certainly talks about this important factors --ecology and entropy. Obviously the same 'didn't see it coming' economists are clueless about this too]  The idea that productive investment eventually exhausts its usefulness presumes a closed equilibrium model with fixed resource endowments. But real economies are open systems, entropic by nature, and require continuous reinvestment to stabilise social and material order.

Conclusion

Critiques of China’s development model that hinge on arguments and claims about hard budget constraints and household financial repression ultimately fall short because they are grounded in a flawed understanding of money and credit. They assume a world of scarce, pre-allocated financial capital where market prices enforce discipline and efficiency. But modern economies, especially those with monetary sovereignty and policy-coordinated banking systems, operate on very different real logics.

Credit is not a fixed resource; it is an enabling mechanism. Enterprise finance is not constrained by household saving; it drives household income, which in turn delivers consumption capacity and savings as a residual. Investment is not a luxury but the necessary condition for thermodynamic renewal, entropy management, structural transformation and long-term welfare. By reframing our understanding of money as a tool of production and circulation, not as a store of value, we can move past the twin fallacies of financial repression and hard / soft budgets, and better understand the logic of dynamic development.

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Wednesday, 15 October 2025

FRAMING CHINA'S HOUSE-BUILDING MIRACLE AS A 'PROBLEM' all to save US hegemony

 

FT article  How the state is propping up China’s housing market    Feb 25 2025

[Here come the chicken-likens!]There is a long-running meme (‘Narrative’) that the US must retain its hegemonic status, that countries like Russia, but especially China must be beaten back before they become equal, OR have fundamental structural weaknesses which will soon cause them to wobble and fall (Ha! See the inconsistency here!!)

This article is a clutching at straws attempt to show China is crumbling. Next time I’ll have a look at how the Chinese banking system works and what is described here is the efficacy of the control system over the banks. After that it’s a post about the amazing house-building market in China

 


Three decades after China liberalised its property market and ushered in a historic era of 

urbanisation, the state is back in force. In Beijing, an FT analysis of the purchases of 440 plots over

 eight years shows that government  backed developers have acquired more than their private counterparts in each of the last three years. Last year, the number of privately owned plots fell to its lowest level since 2018. Outside the capital, a similar pattern appears to be playing out.

Potentially a stabilising factor in a struggling market, the role of state-owned developers raises the question of how China’s property market will change, as a debt binge and the wreckage it left behind gives way to a new era of tighter government control.

China’s National Bureau of Statistics stopped reporting data on developers’ overall land purchases in early 2023, more than a year after the default of China Evergrande fuelled a liquidity crisis in the sector.

Private developers have not entirely disappeared, and state-owned and -linked companies have always been a part of the Chinese property system. But estimates from analysts imply that, in a still-struggling market, they are taking on a growing role.

“This is a structural change,” says Zerlina Zeng, head of Asia Credit Strategy at research firm CreditSights. “After Covid [post-2023] this is getting more and more obvious”.

Zeng’s team closely follows six developers, five of which are state-owned, and estimates that well over four-fifths of nationwide land sales last year were state-driven.

A crucial anchor of both the economy and the government’s fiscal model, the land market was one of the first metrics to flash red as China’s property boom began to reverse four years ago. Land auctions provide revenues for local governments, and the construction industry employs millions of workers.

In the past, developers quickly recycled funds raised from new housing sales to snap up more plots. But government revenues from land sales across the country have almost halved since 2021, and China’s first decline in overall property construction by floor area since 1997, which began in 2022, is accelerating.


The downturn in land sales is beginning to play out in construction

Source: National Bureau of Statistics; Wind; FT calculations

New apartments — where prices have fallen for much of the past two years — are now also largely sold by state-owned developers. In a report highlighting early evidence of that shift in 2023, consultancy Capital Economics said a state-led housing sector “should be less prone to debt-fuelled exuberance” but “may be more prone to wasteful, misallocated investment”.

Like recent mortgage cuts and proposed government repurchases of idle land, the dominance of state-owned developers is interwoven with the government’s efforts to restore confidence in housing. But it also highlights the deep damage done to China’s property model. Even the most financially solid state players are mainly active in wealthy cities, pointing to a lingering challenge elsewhere.

An FT analysis of residential land auctions from the Beijing Municipal Commission of Planning and Natural Resources shows that private-sector developers were more active than state-backed and state-owned firms in 2020, but have since fallen back. Winning companies were analysed using Orbis, a global corporate database, and categorised according to their ownership status.


State-backed developers are now winning the majority of Beijing’s residential land auctions

Source: Beijing Municipal Commission of Planning and Natural Resources; Orbis: FT research

“For the tier 1 cities like Beijing, and other wealthy cities, the trend has been more pronounced as the state-owned developers seize more of the land parcels,” says Jeff Zhang, an analyst at financial services company Morningstar, who suggests there are now around 20-30 such cities across China. “Outside of those, we’re not that optimistic we will see any recovery of land transactions”.

A changing market

Those tier-one cities, which include Beijing, Shanghai, Shenzhen and Guangzhou, have remained relatively resilient to the confidence concerns that have characterised the property slowdown nationwide. Home prices here have fallen, but remain at elevated levels on an international scale — let alone a domestic one — meaning new projects still fetch high prices and the prospect of profits for anyone able to finance them. Increasingly, this means developers with ties to the state.

Close to an area known as the Fragrant Hills in the north-west of Beijing, on land that was home to now-demolished shanty towns, two luxury developments reflect this new reality. One 440-apartment site is a collaboration between Beijing Urban Construction Group and Yuexiu, a state-owned developer from the southern province of Guangdong, roughly 2,000km away.

Two state-backed luxury developments in the Fragrant Hills area of north-west Beijing © Gilles Sabrié/FT

“The reason why Yuexiu came to the north to acquire land is that many private developers have collapsed,” says a sales rep, adding that regulations limit land purchases by private developers. “The cost of acquiring land is relatively high for them,” she says, adding that the process is “government-guided”.

At the second state-backed Fragrant Hills site next door, where marketing materials make much of the area’s imperial connections, 50 of the 90 apartments have been sold already (in China, new properties are typically bought off-plan, before they are complete). They go for Rmb121,000 ($17,000) per square metre, similar to prices in Manhattan.

High prices like these were a major concern to policymakers in 2020 when they attempted to rein in the property market. That year, Beijing restricted borrowing by developers based on balance sheet metrics as part of a policy known as the “three red lines”.

Because many private developers had also borrowed heavily on international markets through Hong Kong, subsequent cashflow pressures showed up in their defaults on offshore bonds. As the cash crunch intensified, the mainland market became awash with severe construction delays and unfinished housing projects.

As a result, the role of private developers in selling new homes has declined markedly. In a report based on data from 50 developers, consultancy group Capital Economics estimated that privately owned developers had historically made up two-thirds of sales of new homes, but in 2023 their share had already fallen to below half. By the end of 2024, the proportion had dropped to around 30 per cent, partly because Evergrande stopped publishing sales data.

“The state is stepping in to fill some of the void left by private developers,” says Julian Evans-Pritchard, head of China economics at Capital Economics, adding that the “shift towards the state would be even more pronounced in the land market”.

“There are clearly financial stability advantages to having [state-owned enterprises] playing a greater role,” he added.

Homebuyers “automatically shift” to state-owned developers when others default, says Zhang, partly because they want assurance that projects will be completed. “This is just the cycle going forward,” he adds.

State control

Although China’s housing market was liberalised in the 1990s, it retains elements of the state control that characterised the previous era. Land is leased from the government, and private developers — which in many cases have close connections to local authorities — are sometimes partly owned by the state, which in the FT analysis is reflected by a third “mixed” category of developers.

State-backed companies also form part of an opaque government machine that can be directed towards any number of initiatives. In recent years, policymakers have unveiled a host of measures to support the housing market, including purchases of complete but unsold apartments that can eventually be used as social housing.

Residential buildings under construction by the struggling builder Vanke at the Isle Maison development in Shanghai © Qilai Shen/Bloomberg

There are also widespread signs of local state banks and government authorities intervening to help finish the delayed projects of failed private developers. The troubled Shenzen-based mixed developer Vanke, the latest company to come under the spotlight, saw new management parachuted in from the state-owned Shenzhen Metro, its largest shareholder, last month. This has added to expectations that there will be more direct government support to avoid a default.

Other measures are more subtle. Zhang at Morningstar says the government previously limited land purchases to three per year in Beijing, but has lifted those restrictions, which he says means “the government is essentially encouraging developers to bid more and spend more in higher-tier cities”.

The One Sino Residence project in Beijing’s Fengtai district fetched one of the highest auction prices of the year in 2023 © Gilles Sabrié/FT

As evidenced by the FT’s visits to multiple state-backed sites in the capital, the apartments on offer largely reflect the still-expensive state of the city’s market and show few immediate signs of any difference from private developments. Their showrooms are often finished with fine details, including scrolls of calligraphy and a gaming room with an elevated screen running the breadth of the wall. Several drew heavily on references to China’s ancient past as part of their commercial branding, or included central gardens evocative of the same theme.

There are “more and more good [quality] houses”, says a sales rep at one of the Fragrant Hills sites. But nationwide, there are also signs that there are too many of them. Goldman Sachs estimates there is Rmb30tn of unsold housing inventory, including land and apartments, in China.

“It’s a lot easier for the government to control the supply,” says Zeng, adding that the “ideal scenario” would be to do so through state-owned developers. “There’s not much they can do on demand.”

Despite repeated cuts to mortgage rates, restoring demand has so far proved a challenge for policymakers. Even in wealthy Beijing, there is concern about consumer confidence. According to the Yuexiu sales rep in the Fragrant Hills, 2024 was “not as good” as 2023.

At the One Sino Residence site in Fengtai district to the city’s south, the mood is also uncertain. The project is being run by China Overseas Land & Investment, a state-owned enterprise that was the biggest buyer of land in both the Beijing area and China last year, according to Morningstar.

The One Sino Residence will have more than 87,000 square metres of housing made up of high and low-rise apartment blocks © Gilles Sabrié/FT

“Now [the market] is basically state-owned enterprises . . . customers will not have too many problems with delivery,” says a rep, in reference to the widely-discussed risks of private developers failing to complete projects.

He receives 30 to 40 prospective buyers on weekends. But such customers, he adds, are in a “wait-and-see mode” as they look for further policy announcements that might make a purchase more attractive.

Beyond Beijing

Analysts of China’s property sector emphasise the differences between Beijing and the rest of the country. One economist estimates that, in contrast to the capital, the vast majority of nationwide land sales are now made by local government financing vehicles (LGFVs) rather than developers.

As the vehicles are owned by the local governments in question, the sales “are mainly to stabilise local land markets, rather than to start new housing projects”, the person added. “Very few private developers are buying land”.

A policy push launched late last year, aimed at encouraging local and regional governments to buy up idle land from developers, points to the depth of the issues. “It is unclear what these cities plan to do with the land they are acquiring,” wrote analysts at rating agency Moody’s in a report this month. But the move “is in line with other recent policies aimed at giving the state a large role in the land and real estate markets”.

According to FT analysis, after several years of increases, land sales declined in Beijing in 2024. In poorer cities and regions, where data is often less accessible and economic activity is more varied, the picture is probably even bleaker.


Land value and government revenues have fallen

*aggregate value of land use rights transferred by the government across 4 first-tier cities, 26 second-tier cities, and 70 third-tier cities, based on traded land parcels Sources: National Bureau of Statistics; Wind; Ministry of Finance

“I think we know the situation is generally worse in many of the smaller cities and the pressure on land sales is more extreme, and therefore I would imagine the political pressure on state-owned enterprises to step in would probably be even more significant than in tier 1 cities like Beijing,” says Evans-Pritchard of Capital Economics.

But the deeper problem is “huge oversupply that has yet to work its way through the system”, he adds. There is “still a lot of construction work . . . but once they are finished they’re not going to be replaced with new projects”.

“I think there’s a temptation [to say] we’re past the worst,” he adds. “That may be true in some parts of the market . . . But for construction, which is far more important for GDP, that is not going to be the case in our view”.

Zeng at CreditSights suggests that China’s economy has become “more [of a] planned economy with more [of a] topdown stance”, and moreover that urbanisation has “significantly slowed down”. The government “just doesn’t need privately owned developers any more,” she says.

At the privately developed Longfor site, work is expected to complete in September this year. After that, construction workers will need to find a job elsewhere. “This is [the company’s] only project in Beijing,” the sales rep says. For the rest of 2025, she adds, projects are “not yet clear”.

Additional reporting by Andy Lin and Wang Xueqiao

Land sales data from the Beijing Municipal Commission of Planning and Natural Resources. Plot footprints from Beijing Platform for Common Geospatial Information Services, Tianditu and Open Street Map. Company ultimate ownership from Orbis. Satellite imagery used in the opening from Airbus DS and Planet Labs.

 

 

 

 

 

 

 

Tuesday, 14 October 2025

CHINA SHOWS HOW TO CRACK DOWN ON AN OVER-HEATING MARKET

 

And so the chicken-likens of the Western commentariat gather round and declare, China is doomed!


HOUSE PRICES IN CHINA

 

Source: Ing  (China housing prices continued to slump in February | snaps | ING Think)

THIS we should worry about? In the last TEN years prices in China for new appts grew by ONE THIRD (33%). Second hand rose by ONE FIFTH (20%). Both peaked in late-2021, and are now slowly subsiding.

That’s a crisis says the Chicken-Lickens? In the UK in the 11 years from 1996 to 2007 under the much- lauded stewardship of Brown and Blair (‘The Great Moderation’), new and old UK houses rose TWO AND TWO-THIRD TIMES (268%), that’s EIGHT times more than in China. And the esteemed FT says it’s China that now has a crisis in their housing market! Praise the Lord that we could have a China style crisis.

How did they do it? Government took action to rein in speculators, developers but mostly banks. External funding (international shark-banks) were almost completely excluded, local banks as if they were like Victorian ladies corsets.

There is a lot of detail here which will be unravelled over the next few posts.

 



Wednesday, 11 June 2025

ANNUAL UPRATINGS The snag with LVT

The Irish Times 9 Jun 25 reports that “Local property tax bands and rates set to be changed to stave off big increases. Changes are being introduced to mitigate effects rising property values have on tax bills”

This is clearly a case of political funk

“Most homeowners will see modest increases in their local property tax (LPT) next year under changes likely to be approved by the Cabinet this morning to mitigate the effects rising property values have on tax bills.

The changes require legislation to widen tax bands and reduce the rate of LPT, Minister for Finance Paschal Donohoe is expected to tell colleagues.

Property prices have increased by almost a quarter since the last revaluation of properties for the tax in 2021. Fearing substantial hikes in tax bills, the Government is expected to change the way the tax is calculated ahead of the next date for revaluation on November 1st of this year.”

 

If there is one thing the taxpayer fears most and will revolt against it’s a sudden jump, however justified, in a one-off tax charge. Fear of the reaction to updating Rating Values was the main reason for the introduction of Maggie’s much-hated Poll Tax. The idea of annual upratings of Land Values is integral to every scheme of LVT that I’ve ever seen.

It seem to be a very cunning mechanism indeed to ratchet up LVT by inflation as if by an inviable external hand. Of course the more LVT rises to its maximum value the more its beneficial effects kick in. Tell that to a granny in a corner-plot bungalow, living near a newly-opening Metro station. Why should they pay 50% more on LVT for a transport facility they are to frightened to use?

And the moral of this is?

Be very careful what you wish for! I’m all in favour of ‘Incremental Improvement’ — making things better a bit at a time. Linking LVT to LV inflation, with annual or even monthly upratings (c’mon we have the technology!) seems a clever way of sugaring the pill. “Sure no one will notice a 1% change”, or even “Go on, if they build a sewage works next door, your LVT bill might go down!”.  

 

Perhaps the maximalists are right. We must convince (force?) the government to spend its political capital in implementing full-LVT. All schemes involving sneaky uprating are doomed to be throttled by politicians’ funk.

 


Wednesday, 5 February 2025

FACT 5: YES, IT IS EXTRA BANK LENDING PUSHING UP PRICES,

Not house prices rising with banks running after them with bigger mortgages

 

This is a technical point to do with Correlation and Causation which slick tricksters try to use to defend the banks’ immoral and incontinent behaviour. So this is a bit longer than previous Facts.

 It would seem clear-cut.  For decades now, mortgage credit 

has marched steadily upward with house prices, 

while other forms of bank credit have tailed off, 

as shown in this graph.

 For 60 years mortgages have followed every twist and turn upwards

Does that prove higher prices were caused by looser lending? Not necessarily!

 

Here’s what J R-C says

“One concern with the view that increases in mortgage debt drive up house prices

is that causation may run the other way: rising house prices (caused by some other

factor, for example, inelastic supply or rising incomes) lead to greater demand for

mortgage credit. However, there are reasons to be skeptical of this view.

 

First, a number of recent empirical studies using careful statistical identification

strategies, such as using financial deregulation as an instrument exogeneous

to demand, suggest that house price rises are more likely to be a response to

credit supply expansion rather than a cause. For example, in one US study (q.v.)

 the authors were able to isolate the extent to which credit liberalisation was

exogeneous to demand in impacting mortgage credit

expansion and associated house price increases. This study found that between

1994 and 2005, deregulation explained between one half and two-thirds of the

observed increase in mortgage loans, and between one third and one half of the

increase in house prices.

Second, other studies have found credit constraints 

to be the most important factor in explaining cross-country differences 

in house prices, which helps to explain different house price responses 

to the same shifts in interest rates.


Third, the UK was not alone in seeing rapid expansions in mortgage credit

correlated with rising house prices. For example, one study found that across 16

high-income economies, on average, mortgage credit rose from 40% of GDP in

the mid-1990s to 70% by 2007, with house prices doubling 

over the same period

Given significant differences in other potential explanatory variables in such 

a large sample of countries, such as the elasticity of housing supply or

changes in income, expansion in mortgage debt, which occurred nearly 

everywhere in the 1990s, is the most convincing intuitive explanation.


Indeed, recent cross-country empirical research shows 

liberalising mortgage credit has actually led to 

lower levels of home ownership 

as affordability has worsened across many advanced economies. 

Furthermore, rising mortgage debt and credit

liberalisation are not associated with increased construction of new homes, as is

often claimed.”

Wednesday, 29 January 2025

Fact 4. Liberalised, predatory finance is the main driver of consumer demand and hence hyper-inflated prices
 

See how prices track lending (mortgages) step by step 




Here’s what J R-C reminds us:

  

“First, a number of recent empirical studies  suggest that house price rises are more likely to be a response to credit supply expansion rather than a cause.  

 For example, a study found that between 1994 and 2005, US deregulation explained between one half and two-thirds of the observed increase in mortgage loans, and between one third and one half of the increase in house prices.

 
Second, other studies have found credit constraints to be the most important factor in explaining cross-country differences in house prices, which helps to explain different house price responses to the same shifts in interest rates.
 
Third, the UK was not alone in seeing rapid expansions in mortgage credit correlated with rising house prices.

For example, one study found that across 16 high-income economies, on average, mortgage credit rose from 40% of GDP in
the mid-1990s to 70% by 2007, with house prices doubling over the same period (see Figure 4 above).

Given all the differences in other potential explanatory variables
in such a large sample of countries, such as the elasticity of housing supply or changes in income, expansion in mortgage debt, which occurred nearly everywhere in the 1990s, is the most convincing intuitive explanation.


It gets worse! Research shows liberalising mortgage credit actually led to  lower levels of home ownership as affordability has worsened across many advanced economies.

Furthermore, rising mortgage debt and credit liberalisation are not associated with
 increased construction of new homes, as is often claimed.
 
Another explanation is that commercial home builders lack incentives to build out at a rate that would reduce house prices, even if more mortgage credit is being made available to theoretically support more construction.

 As a result, more credit flows into competition for existing homes,
 further inflating house prices and developer profits.


Monday, 27 January 2025

 

Fact 3. Buyers seek an asset (land with a house on) and some also want a house (a commodity, a structure, a thing) to live in
 

BTL, landlords, 2nd homers, o'seas buyers of bolt-holes are investors only. 

Those looking for a place to live are both investors and commodity buyers

Here’s what J R-C reminds us:

“Housing has two economic functions. It is both a consumption good – it provides

shelter – but also an investment good. In relation to the latter, residential property

can be:

• a financial asset providing realised and unrealised capital gains, and actual

and imputed rental returns;

• a source of collateral that can enable borrowing and increase purchasing

power, including to acquire additional property;

• a store, and means of passing on, wealth; and

• a hedge against rental risk.

It is important for housing policy makers to understand the impact of both types

of demand to ensure the efficacy of interventions aimed at enhancing housing

affordability. The demand for housing as a consumption good can be understood

as a universal need that the state has an obligation to provide for at a basic

minimum level.”

 

Put simply: the economics of assets is not the same as that for commodities — hence Fact 1: Build More won’t fix it.

 

Sunday, 26 January 2025

Fact 2. 'House' prices are not rising.

It's ONLY the Value of the PLOT 

-the land the house is built on -- 

that is rising, not the Value of the Building. 


Here’s how Josh explains this: 

Rising house prices in the UK and other high-income economies have mainly

been driven by rising land values, with the cost of housing structures tracking

consumer price inflation. 

Land underlying dwellings in the UK has increased in nominal value almost eight-

fold since 1995, from £0.7 trillion in 1995 to £5.4 trillion. 

This is equivalent to an increase from 82% to 252% of GDP.


From an economic theory perspective, capital gains and rental income from

property are normally considered as economic rents – income derived from

control over a scarce asset (land) needed for production – rather than normal

profit derived from productive investment in a competitive market. 


Land has unique properties differentiating it from other commodities, 

including being inherently scarce, fixed and irreproducible, 

which means its owners are able to extract economic rents 

if permitted to do so. Increased financial flows into unproductive assets 

like land and property increase such rents and can be viewed as 

an inefficient allocation of capital, with negative consequences for economic

growth and wealth inequality.”


JR-C gets it! The conclusion that stopping land-price rises is the best fix. 

(Although ‘only’ holding building costs shows a tech failure by the industry)

Sunday, 19 January 2025

 Fact 1: Building Lots More Houses 

                                will not fix it. 

JR-C explains why.

Here’s what he says

“In UK policy circles, explanations of the affordability crisis have focused more

on supply-side explanations. Multiple reviews of the UK’s housing market have

concluded the reason for high prices is due to inadequate provision of new

homes relative to rising demand driven by rising incomes, increasing household

formation (people living in smaller households) and rising immigration. Government

interventions have also focused on supply-side reforms.

However, since the 1980s, successive governments have been unable to

materially increase the rate of housebuilding, which has averaged around 150,000

new units per year.2 The UK housing development sector is dominated by private

sector developers, who may lack incentives to build out at a rate that would reduce

house prices in local areas where they operate.3–5

Moreover, evidence suggests that expansion of the housing stock may have a

limited effect on housing affordability in aggregate. Estimates of the sensitivity

of UK house prices to increases in housing stock consistently show that

a

1% increase in housing stock delivers a 1.5–2% reduction in house prices.6,7


[that’s quite impressive? Elastic demand. A bit cheaper and we’d want(buy) lots more.]

 

Taking into account the growing surplus of housing stock relative to number

of households, this implies that, all else equal, expanding the housing stock by

20% (approximately 5 million homes) over the next 20 years roughly in line with

government projections might bring down prices by around 10%.7 This contrasts

with a 306% increase in mean nominal English house prices since January 2000

(from £75,219 to £305,370).8

 

[That’s what he says: Actual prices rose 306% over the last 20 years.

So even if we could have built 400,000 homes p.a., it only would have reduced prices by 10%!

TEN per cent drop on a total rise of THREE HUNDRED AND SIX per cent! ]

  

Furthermore, new build makes up just 1% of the total of new housing supply that

comes onto the market each year, with the vast majority coming from existing

properties being sold or rented out.9 To achieve more material increases in

affordability in the short to medium term, policy makers also need to consider how

to reduce types of demand – specifically investment demand – that might free up

existing stock for those in housing need, as well as ensuring the most efficient use

of any new supply.”

 

[The clowns who advocate ‘Build More’ as the fix for the Housing Price Crisis haven’t a clue.]

 

Based on

Ryan-Collins, R. (2024). The demand for housing as an investment: Drivers, outcomes and policy interventions to enhance housing affordability in the UK. UCL Institute for Innovation and Public Purpose, Policy Report 2024/13.                                                                  Available at: https://www.ucl.ac.uk/bartlett/public-purpose/policyreport-2024-13. Filed at HML/HousingMarket/Invest