Economics Students Published in Financial Times

Local government and national debt are different

Tom Hancock, in “China slum clearance strains local authorities” (April 24), examines how local Chinese governments are struggling to compensate displaced individuals because of government debt restrictions. However, the lack of clarity about the so-called government debt contributes to perpetuating a misplaced concern about the government’s ability to pay for new housing units.

The assumption that all debts are the same and have equally negative impacts on the economy is misguided. There are differences between local government and national debts. While local governments face financial constraints, the national government does not because its monetary sovereignty dictates that the focus ought to be on the inflationary potential of its spending rather than on some arbitrary debt level.

The Chinese national government can, therefore, pay for the housing costs, while local governments focus on project management, efficiency, and transparency of the housing relocation and compensation programme. As long as China has the necessary skilled labour, materials, and equipment to build new housing units, and as long as its regulatory framework minimises speculative behaviour in the real estate market, inflationary pressures will be kept under control.

Helping people understand the difference between debt at the local versus the national level is crucial for a coherent public discourse about government debt.

Alex Balogh

Chardon, OH, US

The sign of China’s ‘rebound’ may be a housing bubble

You report (“China house price surge points to recovery”, April 17) on the significant improvement in the Chinese economy after a difficult start to the year.

However, what appears to be a healthy rise in home prices may in fact be a housing bubble that is being overlooked by the government. This is not an economic rebound. It’s a classic Minsky moment in the making.

China’s sluggish economic growth has prompted the government to focus on housing market growth to compensate for weaknesses in its exports industries. The housing market now accounts for about 25 per cent of the total economic output. Although China’s intentions were to spur growth, it has instead laid the seeds of its next crisis.

Minsky moment crises are known for happening when investors take on too much debt during an economic boom. The Chinese government wanted to encourage market demand by making credit more accessible, and by doing so it has gone back on its more prudent position that “houses are for living in, not for speculating on”. This looser credit environment is certainly expansionary and is underwriting the desired economic stability sought by the Chinese government, but as Minsky said, “stability breeds instability”.

The rising debt-to-income ratios, increased risk exposure by the banks and rampant speculative behaviour in real estate are fuelling this market bubble, and will ultimately bring about a credit crunch in a classic Minsky moment. I would argue that the Chinese economy is actually in a fragile state.

To prevent a housing crisis, China needs to instil a more prudent credit policy, and to ensure a steady rise in wages and incomes so that homebuyers can validate their debts. Failure to do so will add fuel to fire. The speculative housing bubble will ultimately burst and will send the housing market of the second-largest economy in the world crashing.

Francisco Becerril

Chicago, IL, US

Japan has problems that the BoJ cannot solve

Robin Harding (“Stubbornly low inflation leaves Bank of Japan in limbo”, FT.com, April 21) laments that years of monetary policy stimulus in Japan has failed to boost growth and to meet the BoJ’s inflation target. The problem is not just that monetary policy is ineffective, but rather that Japan’s problems are rooted in non-monetary phenomena.

Japan needs to address the problems of economic slowdown and low inflation in other areas of public policy. Japan continues to face three structural issues that monetary policy alone cannot fix. First, its exports engine has stalled since the 1990s, but domestic consumption, while strong, cannot make up for stronger exports. Second, its ageing population amplifies the high savings culture that has been fuelled by uncertainty about the future of the economy. And third, Japan’s immigration policy, or lack thereof, coupled with the low birth rate, continue to put a damper on economic growth.

Japan must introduce policies that will encourage more people to consume, rather than save, for example by providing a more generous guaranteed income for retirement to decrease workers’ anxiety about the future. To jump start Japan’s exports, perhaps a more expansionary development assistance programme can open new markets for Japanese products. Finally, a more open immigration policy and stronger incentives to increase Japan’s birth rate will provide the necessary boost to bring more vitality to its economy. In short, the solutions to Japan’s problems are not in the hands of the BoJ.

Kinley Rigzin

Thimphu, Bhutan