2014-05-23

Andy Xie on New Economy's Birth Pains

The language in Xie's article echoes that used in a Chinese article a couple of weeks ago: China's Real Estate Market Is Being Baptized Into The Market Economy.

The whole article is good, and in English, so click through to read it. Here's the concluding section.

The Birth Pains of a New Economy
The most damaging aspect of the bubble is to distort value among investors and businesses. Over the past decade, making quick money through government connections and speculation has become dominant. This is why, despite the massive increase in GDP, few competitive companies have emerged. The companies that command public and policy attention are in finance and property. Successful speculators have become today's heroes.

The deflating property bubble will destroy speculators. As they are so prominent in the economy, the pain is acute to them and the economy. This process is absolutely necessary. Unless entrepreneurs, businesses, investors, and government officials go back to focus on creating lasting value, China's economy cannot go forward.

China's rise depends on working hard and saving money. When people forget these traditional values and embrace speculation, the country goes backward. Deflating the property bubble is the birth pain for a new economy. It must happen.
The one point I'd add is that speculation cannot be sustained without credit. The key is the government's hands off approach in the credit market: monetary policy has been mostly unchanged and the market itself is reigning in credit.

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