Summary of Key Points
Professor Zhao Yanjing believes that the Chinese economy is shifting from an approach focused on "incremental expansion" (building new houses and selling land) to one that emphasizes "improving the quality of existing assets." Real estate is no longer just about constructing buildings; it has become a cornerstone of social credit. If housing prices stabilize, inflation can be prevented; the key to resolving local government debts is not to repay them directly but to increase the value of existing assets. The future engine of economic growth will still lie in the "debt sector," and it is necessary to develop an equity market on par with the land market size (allowing existing assets to be traded like stocks) in order to convert stagnant assets back into liquid capital. Ordinary people should prioritize holding equity assets (such as real estate and stocks) rather than cash to avoid a reduction in their wealth.
1. Real Estate: From "Building New Houses" to "Maintaining Housing Prices" – A Structural Transformation
In the past, real estate was about increasing supply; urban expansion required more housing, and revenue from land sales supported local finances. However, urbanization has now reached a stage where the demand for new homes in most cities (except for a few leading ones) is essentially saturated. Building more new houses will only increase inventory and drive down prices.
Why is it necessary to "abandon quantity in favor of maintaining price stability?"
- Housing prices are a stabilizing factor in China's financial system: Houses are the main source of family wealth and serve as collateral for bank loans. If prices fall, household assets shrink, banks become reluctant to lend, businesses struggle to obtain funding, and overall economic activity declines (leading to inflation), affecting all sectors.
- Traditional market rescue measures have been ineffective: Attempts to lower housing prices by increasing supply or restricting demand have had the opposite effect—excess supply has led to further price drops, and weakened demand has made the market even more sluggish.
The correct approach is:
- Reduce new housing supply: Stop selling land and limit the construction of new developments to avoid accumulating inventory.
- Maintain existing housing prices: The government should purchase existing properties (such as unfinished buildings or those sold at auctions) and convert them into affordable housing to stabilize expectations.
- At the same time, provide affordable housing to ensure that people without homes can afford to live in them.
2. Local Government Debts: The Key is Not Repayment but Increasing Asset Value
The root of local government debts lies in the reliance on land sales for revenue; with fewer land sales, debts are harder to repay. Direct repayment is ineffective. For example, if you owe 1 million yuan and your house is worth 1 million yuan, you can pay it off, but if the value drops to 500,000 yuan, even a payment of 500,000 yuan will still leave you in debt.
How to solve this? By increasing the value of existing assets:
- Replace high-interest debts with low-interest bonds: The central government can issue low-interest bonds to local governments to replace their higher-interest debts, reducing interest burdens.
- Purchase existing assets: Local governments can use these bonds to buy unfinished or dilapidated buildings and convert them into affordable housing. Once prices rise, they can sell the properties, stabilizing prices while increasing asset value.
- Allow special bonds to invest in equity markets: These bonds can be used to buy stocks or real estate, increasing demand and thus driving up prices.
It is essential to avoid creating new debts while trying to repay existing ones; instead, funds should be used to enhance the value of existing assets.
3. Fiscal and Tax Reforms: From "Selling Land" to "Selling Equity" – New Rules Are Needed
In the past, local finances relied on land sales, which provided a one-time influx of revenue similar to an IPO for companies. Now, the focus should shift to an "equity market based on existing assets," turning assets such as subways, parks, and office buildings into tradable securities.
How to implement this?
- Asset securitization: Bundle real estate into separate entities (SPVs) and issue shares for investors to buy and sell.
- Charge for public services: Continue charging for utilities like roads and convert these fees into assets that can generate revenue. As long as there is cash flow, assets can be valued and avoid becoming a financial burden.
- Break old rules: For example, the initial land auctions in Shenzhen were once deemed unconstitutional but later became models for reform. Similar bold reforms are needed to allow for innovative transactions of existing assets.
4. The Next Engine of Growth: The "Equity Market on the Debt Side" – Not Just Technological Progress
Many believe that the next driver of growth will be technologies like AI and semiconductors, but Professor Zhao Yanjing points out that China faces constraints due to its high debt levels. While China has abundant assets (factories, houses, infrastructure), it lacks an equity market that can convert these assets into liquid capital.
Why is the debt side important?
- Debt-driven expansion can create money: Forging a mortgage on a house creates new currency that enters the economy, boosting activity.
- Equity markets are crucial: Stock markets and real estate securitization markets enable rapid asset transactions and increased valuations. For instance, the large and liquid U.S. stock market is a key driver of its economy.
- Technological progress should be targeted: While AI and renewable energy can save labor, China's current demand constraints may limit their impact. However, "debt-side technologies" (such as asset securitization) can increase asset value and create more money, which is more urgently needed.
5. What Should Ordinary People Do?
- Avoid holding cash; instead, invest in equity assets.
- Cash loses value over time: One dollar in 1920 was worth only 5 cents today. Holding cash means losing wealth.
- Prioritize equity assets: Real estate in core cities, stocks of quality companies, and funds. These assets tend to maintain or increase in value over the long term.
- Understand the concept of equity: Your house is not just physical property; it represents a potential source of income in the future. As the equity market becomes more active, these assets will retain their value.
Conclusion
The transformation of the Chinese economy is essentially shifting from relying on land to create new assets to using markets to activate existing ones. Real estate should focus on maintaining prices rather than increasing supply, local government debts should be managed by increasing asset value, and fiscal and tax policies should promote the development of an equity market. Ordinary people need to adapt by converting cash into assets that can appreciate in value to keep up with the times.