Source: Xinchao meditation (ID: Xinchao chensi)
Author: Kafka of xinhuamen
In the economic field this year, some advocates of “pills” have been using the credit issue to publicize their ideas, resulting in a simple view: “the decline of Social Finance – economic depression – pills”. In fact, social finance is closely related to the derivation of credit based on land. Apart from the painful determination to rectify the real estate enterprises, land finance and revolving credit since the end of last year, it is not enough to understand the real situation this year. In addition, some people advocate this “pill” for the purpose of “saving the market”, claiming that only by saving the real estate, the economy will not be a “pill”. These two arguments are essentially advocating that as long as the real estate is rectified, China’s economy will be ruined.
No matter what the public opinion is, it is obvious that in 2022, China’s real estate problem has really reached a crossroads. Next, in the previous article, “under the pressure of shutdown and loan interruption, deleveraging should be insisted to the end”, we continued to talk about why we can no longer save the real estate.
Real estate is a reservoir, not a reservoir
For many years, there has been a popular saying in popular discussions, that is, “real estate is the reservoir of money”. The author believes that this is a very typical and widely spread fallacy.
The so-called “reservoir theory”, That is to say, “due to the long-standing phenomenon of excessive issuance of money, the growth rate of money exceeds the growth rate of commodities. Therefore, in order to stabilize prices, it is necessary to guide the money that is faster than the growth rate of commodities to other fields. The real estate is the field used to absorb this part of excessive issuance of money. Since liquidity is often used to describe money, the field that absorbs excess money is also called a reservoir”.
At first glance, this view seems to be very reasonable. In particular, it needs to be mentioned that this view of civil science is related to the historical origin of China’s political establishment. Whether it is the issuance and withdrawal of currency by the Red Army on the long march or the recovery of excess currency through high premium during the period of “adjustment, consolidation, enrichment and improvement”, It seems to indicate that the macro-control means of “monetary reservoir” is an effective means in the historical experience of economic governance in China, which will naturally give rise to an associative hint that “housing is the monetary reservoir in the new era”. Is this really true?
Let’s take a look at the policy of recovering money at a high premium during the period of “adjustment, consolidation, enrichment and improvement” as an example. The sales policy at that time was as follows: 1 cent for a steamed bun. If you need to buy a second steamed bun (outside the plan), you need 3 cents instead of 1 cent. Through ladder pricing, the previous “excess currency” will be brought back.
However, in fact, this statement is not rigorous. During the Great Leap Forward period, a large number of investments have been generated due to the rapid development of large-scale projects. These investments are dependent on the state behavior of banks and are actually based on credit. The excess credit generated by administrative actions at all levels is converted into money, which is matched by the lack of actual material production capacity or consumption or digestion of economic subjects. This is the source of the so-called “excess money”.
This part of money had serious consequences in 1961. Take Shanghai as an example, its retail price index in 1961 increased by 6.4% over the previous year, which has actually caused huge fluctuations. Considering that the three major transformations of unified purchase and marketing and socialism have just been completed, the urban and rural supply system has been changed to supply most of the living materials with tickets and formulate business plans according to the quantity, such an increase can be said to be huge. Therefore, this kind of step pricing to recover money is not a clever idea, but a must under the combined attack of money quantity and actual commodity supply.
Therefore, in China’s economic history, Real estate has really played a “reservoir” “The period of effect is actually a short period after the commercial housing market system was formally formed in 1998. This is not a long-term strategy, but it had to be done at that time. Because domestic credit was not developed at that time, most of them were cash based regardless of whether they bought houses or land, and real estate can indeed recover cash. However, with the development of domestic financial credit after the new century, this function will soon disappear.
From the perspective of curbing the short-term rise of consumer goods prices, the reservoir theory is reasonable, that is, let excess money not flow into ordinary consumer goods but into the real estate market. However, from the perspective of monetary transmission mechanism, the so-called “reservoir” of real estate can not ultimately keep money from spillover.
If “real estate is a reservoir of money” and its purpose is to recover excess funds, all transactions should be conducted in cash and the excess currency should be written off. In the public regulations, when the real estate enterprises are required to conduct land bidding, auction and listing, the payment of land transfer fees should use their own funds. The author has discussed this with a senior manager of the real estate industry. From this point of view, there are not even a few people who think that the real estate is a reservoir in the management and supervision. Even when the author chatted with an economics teacher in Wudaokou, the teacher said the same thing. But in fact, this requirement has never been really implemented. Including the pre-sale housing system, the fund custody and supervision system, which has been a mere formality for many years.
If China’s real estate enterprises have so-called self owned funds, how did Wanda, Evergrande, rongchuang and country garden expand their asset scale hundreds of times in just a few years or more? Is it possible to leave the magic of finance? Without the lever, is it possible?
Whether it is the head real estate enterprises such as Evergrande or the small and medium-sized real estate enterprises in various places, there is only one attitude towards financial leverage, “should be increased as much as possible”. It is precisely this crazy increase of leverage that has led to the three red lines for the real estate industry since last year. All enterprises have shown a tight capital chain, so that the funds misappropriated for pre-sale of real estate in violation of regulations are still insufficient to fill the loopholes in capital turnover, and finally there is a large-scale shutdown.
The reservoir theory regards the real estate industry as “only in but not out”, which is a great fallacy. In fact, after receiving the housing funds, the real estate enterprises need to pay the land transfer fees, the wages of employees, repay short-term and medium – and long-term loans, pay the shareholders’ shares and dividends, and generate the income of executives and bosses. After all, the real estate enterprise is also an enterprise, and there is no interest in the feudal era in which the landlords’ wealth converted their profits into gold and silver and then hoarded them.
Therefore, the contemporary real estate is not a reservoir, but a drain.
The circulation of China’s monetary system
From the creation and derivation of credit currency, in the modern credit currency system, currency is a kind of value symbol backed by coercive force and recognized by the public. The foundation of this value symbol is the social credit relationship. His creation place is the commercial banking system. According to the accounting standards of the financial system, when commercial banks distribute loans, they will generate deposits at the moment when the loans are generated. That is, I borrowed 100 yuan from the bank. After approval, I owe 100 yuan to the bank and there will be 100 yuan of current funds in my bank account.
Therefore, it is credit that creates money. It can be said that most deposits are derived from credit, and cash is obtained from deposits. Therefore, it can be said that credit creates financial activities under the commercial banking system. What forms a large amount of money creation in China is foreign exchange and housing mortgage loans.
In terms of figures, by the end of 2021, China’s broad money (M2) was 238.29 trillion yuan, while the balance of RMB real estate loans was 52.17 trillion yuan, that is, more than one fifth of the money was derived from real estate loans. Let’s compare historical data. In 2011, China’s broad money volume was 85.16 trillion, while the balance of housing loans was 2.2 trillion. In the past decade, M2 increased by 153.13 trillion, while the balance of housing loans increased by 50 trillion. I can calculate the relative change ratio.
This is not the accumulated amount of new housing loans, but the balance of open data. In fact, the accumulated amount of new money is the amount of new money after dehydration. The “over issuance of money” in folklore mainly means that the growth rate of China’s broad-based money supply is faster than the nominal growth rate of GDP, so it is undeniable who constitutes the newly increased broad-based money supply.
Let’s go back to the creation and derivation of money. After the application of the buyer and the approval of the bank, the housing loan is transferred to the deposit account for the payment of the housing loan and becomes the new currency (M2) in the market. The real estate enterprises then use this part of funds to pay their own business expenses. Therefore, if we say that in the 1990s, when the credit system was underdeveloped, the real estate industry also played a role in moving the profits of other departments to the government financial system and spreading the profits to the upstream and downstream building materials and household appliances consumer goods, then in the past decade, the real estate industry was not a “reservoir of money” at all, but a “reservoir of derived money”. The broad money (M2) derived from real estate credit exceeds at least one third of the new broad money (M2). This shows that real estate is a “sink”.
From the 1980s to the 1990s, refinancing and rediscount were the main channels for the people’s Bank of China to release basic money. In 1993, the ratio of rediscount and refinancing to the base currency of the same period reached 86.8%. The basis of rediscount and refinancing is the acceptance and recognition of commercial banks for industrial and commercial enterprise bills and credit. This is also the driving force for local governments to “run enterprises” in the 1990s.
After China’s entry into the WTO, the source of the basic currency has become the exchange settlement dollar. In recent years, the growth rate of the base currency is limited, because more money is converted into credit. That is, the derivation of housing loans, which is the driving force for local governments to turn to “managing cities” since the new century.
Real estate credit derivation is a kind of credit derivation speed that is far faster than the operation of general industrial enterprises and service industry. It is generated against the background that China has accumulated huge capital and production capacity under the years of efforts to build an export-oriented market economy, and has transformed the production capacity into domestic urban and social infrastructure construction under the condition that foreign exports have increased to the ceiling, Including tangible hardware construction and intangible social service and security system construction.
Land derived credit system needs to shrink: not only land finance
In 2010, China’s urbanization rate was 51.27%, and the urbanization rate of registered residence was 34.71%. The difference during this period is that about 17% of the national population can not enjoy the same public service system as the city, such as medical care, education and social security, but the permanent residence has become a city; In 2021, China’s urbanization rate has reached 64.72%, and most regions have realized the free flow of registered residence.
At the same time, the author takes Zhengzhou as an example. “According to official data, in 2010, the built-up area of the central urban area of Zhengzhou was 316 square kilometers, and in 2020, the data reached 709.69 square kilometers.” It can be said that the main tool that carries the hardware and software of urbanization and enables China to quickly shorten the gap with western developed countries in a relatively short time is the “land finance” through real estate.
Therefore, from the perspective of finance, the most remarkable thing that has happened in the past decade is not the technological progress and the improvement of total factor productivity, but the reconstruction of spatial social relations and social composition brought about by urbanization. This reconstruction is based on the investment of urbanization software and hardware, and is the core of economic growth in the past decade. According to China’s government accounting system, the government’s income has two dimensions. One is the general public budget, that is, the taxes and fees in common sense, and the other is the government fund. Now the main body is the land transfer fee.
According to the relevant data disclosed by the Ministry of finance, from 2011 to 2021, the national land transfer revenue was 3316.6 billion yuan, 2842.2 billion yuan, 4125 billion yuan, 4294 billion yuan, 3254.7 billion yuan, 3745.7 billion yuan, 5205.9 billion yuan, 6509.5 billion yuan, 7791.4 billion yuan, 8414.2 billion yuan and 8705.1 billion yuan respectively, totaling 58.20 trillion yuan. This part of financial resources is the source of the beautiful urban construction and the brilliant night scenery in many places, the basis for giving high salaries to the “teachers and doctors” group, and the financial support that the mainstream social consciousness believes that the government (has the financial resources) will support the economic development in any case.
(by the way, I recommend the book “stay in the business” by LAN Xiaohuan, a teacher from Fudan University , a good introduction to China’s economic operation model. Financial resources are the basis for the operation of local governments, because both investment promotion, industrial subsidies, infrastructure, environmental and social subsidies depend on financial resources; It is inconceivable to introduce the production lines of BOE and SMIC, support the central industrial projects, support the homestay industry, or encourage the return of farmland to forests and grasslands, protect the ancient folk buildings without financial support. Wechat reading has an electronic version.)
Since September last year, the three red lines for real estate enterprises have restricted the borrowing of real estate enterprises. In addition, the financial environment has affected the liquidity, and the financing capacity of real estate enterprises has declined significantly. According to the data of the Ministry of finance, the income from the transfer of state-owned land use rights in the first half of this year was 2362.2 billion yuan, a decrease of 31.4% over the same period of the previous year. That is to say, the local fiscal revenue alone decreased by 1 trillion yuan, and it can be predicted that it will decrease even more in the second half of this year.
Land based credit is not only land finance, but also local financial behavior, social services and public governance under the support of local finance, as well as the sales of consumer goods based on the broad real estate market and an exceptionally wide range of service industries.
The decrease in land transfer fees is due to the standardization of the three red lines, that is, in August 2020, the central bank, the China Banking and Insurance Regulatory Commission and other institutions proposed indicators for real estate enterprises: 1. The asset liability ratio after excluding the advance receipts is not more than 70%, 2. The net debt ratio is not more than 100%, and 3. The cash short debt ratio is greater than 1.
Through the three red lines, in fact, most of the leveraged “crime tools” of the real estate enterprises have been “confiscated”, with the aim of stopping the credit creation based on land. Even if the problem of loan interruption is rampant, the liquidity instruments arranged for the special financial support for the “guaranteed delivery building” are also policy banks rather than commercial banks.
Data source: Ministry of Finance figure source: self drawn by the author
Based on the above rough data decomposition, the author has explained that from the perspective of money supply, the core driving force of economic growth in 2010-2020 is urbanization, and the civil engineering, infrastructure, new businesses, investment and public service system (medical and health, education, social security and social work, government management, etc.) attached to the urbanization process support the sustained economic growth. The sustainable power is land-based plus leverage, which is expressed in the form of deriving from the balance sheet based on land and real estate. This conclusion is also relatively recognized. It can also be measured and regressed by the Solow model for comparative analysis of total factor productivity.
Therefore, no matter from which angle to solve the real estate foam problem, we need to take the balance sheet as the analysis basis, and finally realize the reduction of the scale of the balance sheet of the real estate.
From this perspective, the full implementation of the expected three red lines and the non speculation of housing and housing will result in a chronic “recession” of China’s balance sheet, but the recession process should be controllable and predictable. In fact, the loan interruption in the first half of the year was within the expectation of the policy implementation. It was only because the black swan of macro-economy was superimposed at the same time, resulting in unexpected large fluctuations. Because of the outbreak of the epidemic in Shanghai, the PMI of the service industry was 36.2% in April and 41.4% in May (generally lower than 50% is recession, and higher than 50% is prosperity. By contrast, the PMI in June was 54.5% and that in July was 55.5%). The original low prosperity expectation and unexpected negative impact were superimposed to create a difficult situation this year.
The contraction of the balance sheet naturally makes it difficult for many places to bear. This is because of the rigidity of the public budget and the “soft budget constraint” under the constraint of political achievements. The shrinking scale of the budget and economic activities is far faster than the adjustment speed of the local government. Not long ago, the author even heard of more absurd operations. Against the background of the large-scale credit release since April, a city in a province with excessive liabilities has lent consumer loans to its civil servants through its urban commercial bank, and then the civil servants lend the consumer loans to the urban investment company of the city. The urban investment company refinances or pays to the government, and the government gets the money to realize the “Three Guarantees”, That is, the basic people’s livelihood and public services and the salaries of teachers and doctors.
In the final analysis, the reduction of social finance encountered at present is the result of fundamental structural changes and the change of credit mode in the past decade. It can be said that China’s currency derivation and transmission mechanism has reached the moment of “another change”. In fact, the macro economic situation this year was already within the expectation at the central economic work conference last year. In the “demand contraction, supply shock and weakening expectation”, the demand contraction and weakening expectation actually describe such a situation.
The land finance supported by the real estate market has come to an end. If we want to realize the transformation, there will be huge pain. But if we do not transform because of the huge pain, we will really have no way to go. In any case, this is bound to be a period of chaos in public opinion.
Then, in the face of such a situation, how will the future development evolve, how will it be adjusted and reversed through policies, and what new cornerstone should be used to replace the land finance model? We will talk about it in the next chapter.