China’s economic challenges for 2016

First, the good news:

Zimbabwe is willing to commit to the yuan.

Zimbabwe is not worth a lot right now, other than in terms of diplomatic prestige. It remains to be seen whether China can bring Zimbabwe into its sphere of influence.

Then, the long-expected news:

China will continue to actively destock its massive property inventory over concerns that the ailing housing market could derail the economy.

Along with cutting overcapacity and tackling debt, destocking will be a major task in 2016, according to a statement released on Monday after the Central Economic Work Conference, which mapped out economic work for next year.

Attendees of the meeting agreed that rural residents that move to urban areas should be allowed to register as residents, which would encourage them to buy homes in the city. Property developers have been advised to reduce home prices, according to the statement.

“Obsolete restrictive measures [in the property market] will be revoked,” said the statement, without specifying which “restrictive measures” it was referring to. To rein in house prices, China has been trying to curb real estate speculation, with policies such as “home purchase restriction” that only allows registered residents to buy houses. It is believed the restrictive policies mainly affected the property markets in third- and fourth-tier cities, which saw the most supply glut.

The property market took a downturn in 2014 due to weak demand and a supply glut. This cooling continued into 2015, with sales and prices falling, and investment slowing.

Property investment’s GDP contribution in the first three quarters of this year hit a 15-year low of 0.04 percent. The property market is vital to steel and cement manufacturers, as well as furniture producers; its poor performance would breed financial risks.

GDP growth during the January-September period eased to 6.9 percent, down from 7.4 percent posted for the whole of 2014. Policymakers believe the housing inventory will be lessened as long as rural residents are encouraged to buy.

Nearly 55 percent of the population live in cities but less than 40 percent are registered to do so. There are around 300 million migrant workers but most are denied “hukou” (official residence status). In addition to housing rights, a hukou gives the holder equal employment rights and social security services, and their children are allowed to be enrolled in city schools.

Starting next year, China will roll out policy to transform 100 million farmers into registered urban residents, according to Xu Shaoshi, head of the National Development and Reform Commission, on Tuesday. No deadline for completion was specified.

Ni Pengfei, a researcher at the Chinese Academy of Social Sciences, estimated that if 70 percent of migrant workers buy homes in the cities, it would solve the 2.2 billion square meters of housing inventory.

Aside from the promise of urban resident status, the government is suggesting a reduction of home prices. The monthly income for migrant workers in 2014 was 2,864 yuan (440 U.S. dollars), while property can easily exceed 10,000 yuan per square meter.

Finally, the news that no one has mentioned: China needs colonists. China needs roughnecks to go out into the deserts of Kazakhstan and build some new railroads. It’s not clear whether the Chinese government is taking this challenge seriously.

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