05 March 2013

Kung Fu Panda

To recap: Friday was the release of a report from China's State Council (not yet known to me) that recommended a 20% capital gains tax on home sales; Sunday "60 Minutes" runs a piece which both details a woman real estate billionaire (only commercial buildings), and miles upon miles of developments and whole cities of empty high rise residential building; finally, today a report in the NY Times referencing the report. After the "60 Minutes" piece, I considered typing up something, once again emphasizing the wastefulness (from a macro-investment point of view) of "investing" in residential building. But, that seemed too much like beating a dead horse.

Until today. Investment, particularly according to the Supply Side Phanatics, is the key to growth. They're both deluded and lying, of course. Laffer makes occasional forays out from his burrow, but the notion that capitalists will buy new plant and machinery just for the hell of it, and flood the market with larger amounts of cheaper goods, absent unmet demand, is just a lie. Real investment happens only when real returns are expected. The problem we face is a slackening of endogenous demand. Both the Germans and the Chinese, or any export dependent economy, are mostly in the business of exporting poverty. It's not that exporters are necessarily smarter producers, but that they're able to enforce poverty in their labour force.

In order for exporters to make money on their capital, they need for their currencies to devalue labour. It works like this, if Adam Smith had it right (he didn't): the purpose of exchange rates is to level the playing field. What really happens is countries with sufficient juice game rates. Since capital has always been without-borders, and is completely so now, there's no way for sovereigns acting alone, to punish rapacious capital. In fact, given the love capital has for Fascism, capital migrates to sovereigns that are most repressive. After all, profit can only come out of wages if capital is fully fungible. That last bit means: high return uses of capital can't hide, thus fiduciary capital will always migrate to sectors of high return. As the migration progresses, returns (due to increased supply of capital) drop. The only way to maintain the initial level of profit is to squeeze out wages. Thus, exporters are just exporting poverty to other nations. In due time, no one can afford to pay the price needed to generate outsized real returns to capital. But given the asymmetric nature of the war twixt labour and capital, "due time" can be quite long, and generally happens with real warfare.

Thus, the reason, not too often admitted, is that the average daily wage in China is on the order of $2/day. Now, in the cities which support the export sectors, it's a bit higher. But living conditions aren't a whole lot better; thus the suicides at Foxconn.

The odd part of the story, for those who haven't been singing along, is that the housing bubble in China exists for much the same (although more extreme) reason as it has here: wages are poor, nominal returns to savings are poor, and access to other fiduciary assets is largely non-existent (more extreme than the US).
With loans readily available again, there are signs now that rising real estate prices might be back. The National Statistics Bureau reported that prices jumped in 54 of the 70 cities tracked by the government in January. In Shanghai, for example, average property prices were up as much as 40 percent in the first two months of the year, compared to the same time last year.

According to the "60 Minutes" piece, these empty developments and cities are "owned" by individuals. Unoccupied, but owned; in what sense I'm not sure. The piece indicated that people were buying up multiple units, anticipating flipping at some point. What wasn't described is the fiduciary element: are the buyers plunking down cash on the barrel head, or mortgaging as in the US? A collapse has more immediate effects in the former than in the latter case. Long term, six of one ...
In another worrying trend for the Chinese government, the flood of credit in the last few months has failed to cause a sharp uptick in sectors other than real estate; instead, the Chinese economy seems to be settling into a slower long-term growth rate even when receiving strong monetary stimulus.

While our Right Wingnuts bray that The Gummint is stealing capital from business (it isn't), it's been the siphoning of capital to un-productive building. Only in China, it's much, much worse.
Among the major challenges Beijing's new leaders face is how to cope with a widening income gap and how to address inflation and the high cost of housing for ordinary Chinese.
A popular comparison among recent college graduates is that their typical paycheck of $500 a month means that in an entire year, they could save only enough to buy two square meters, or 21.5 square feet, of an apartment in a large coastal city, and then only if they spent nothing on food or anything else. Buying an 800-square-foot apartment could take the paychecks of an entire career, by that calculation.

When I was living in DC, at an age when most of my colleagues were marrying, breeding, and moving into mortgaged McMansions in Northern Virgina, the daily refrain from them was, "We're house poor".

Housing capital gains gaming is a pure Ponzi scheme. It only works when mortgage holders, en masse, have rising real incomes. Rising (aggregate) house prices are merely an aftereffect of a rising tide lifting all boats. As we've seen here in the US, and the Chinese for similar and more corrupt reasons, absent real median income rising, the only way to generate outsized capital gain on housing is corruption in the system. That's all folks.

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