In yesterday post, using as our text a New York Times article on the proposed comprehensive slum redevelopment of Kashgar, Xinjiang:

Kashgar, though, is not a typical Chinese city. Chinese security officials consider it a breeding ground for a small but resilient movement of Uighur separatists who Beijing claims have ties to international jihadis. So redevelopment of this ancient center of Islamic culture comes with a tinge of forced conformity.

As far as I can tell from my fractured central Asian history, the Uighurs belong to China for the same reason the Scots belong to England; isolated by geography (Scotland the Norwegian Sea, Xinjiang by the Tien Shan mountains) and dominated by a more fertile, and more populous, contiguous neighbor through whom they have to pass; plus they were a strategic way station on China’s Silk Road.

China supports an international plan to designate major Silk Road landmarks as United Nations World Heritage sites — a powerful draw for tourists, and a powerful incentive for governments to preserve historical areas.

What reasons do the Chinese give? Are they credible?

Chinese officials have offered somewhat befuddling explanations for their plans. Mr. Xu calls Kashgar “a prime example of rich cultural history and at the same time a major tourism city in China.” Yet the demolition plan would reduce to rubble Kashgar’s principal tourist attraction, a magnet for many of the million-plus people who visit each year.

Not much of tourist interest here: Kashgar, April, 2009

But Kashgar is missing from China’s list of proposed sites.

The dog that didn’t bark in the night?

“The Chinese government did nothing about Kashgar’s historic importance.”

“That was the curious incident,” remarked housing consultant Sherlock Holmes.

One foreign official who refused to be identified for fear of damaging relations with Beijing said the Old City project had unusually strong backing high in the government.

I’ve never yet encountered architects and historic preservationists high in government. The evidence is piling up.

Dust to dust? Redevelopment in Kashgar

The project, said to cost $440 million, began abruptly this year, soon after China’s central government said it would spend $584 billion on public works to combat the global financial crisis.

It would complete a piecemeal dismantling of old Kashgar that began decades ago. The city wall, a 25-foot-thick earthen berm nearly 35 feet high, has largely been torn down.

Mud but historic: Kashgar’s city wall

In the 1980s, the city paved the surrounding moat to create a ring highway. Then it opened a main street through the old town center.

As I wrote in cities’ cryptobiotica, I’m deeply suspicious of clear-cutting cities and slums in the name of traffic efficiency:

Those who uprooted whole communities, clear-cutting the neighborhood and redepositing it elsewhere in the city, overlooked the intangible, wetware community.  They saw the slum’s exterior manifestations – the dirt, the overcrowding, the ill health, the poverty – and that blinded them to its assets – the tightly knit community, the aggregated and distributed knowledge.  So Robert Moses could cut a swath through New York with his Cross-Bronx Expressway, oblivious that when he did so, he killed that chunk of Harlem for forty years.

Open-heart surgery on a neighborhood

Despite or because of China’s actions, Kashgar retains much of its uniqueness:

Still, much of the Old City remains as it was and has always been. From atop 40 vest-pocket mosques, muezzins still cast calls to prayer down the narrow lanes: no loudspeakers here.

A city and its mosques: Kashgar

Hundreds of artisans still hammer copper pots, carve wood, hone scimitars and hawk everything from fresh-baked flatbread to dried toads to Islamic prayer hats.

Shop in Kashgar Old Town

And tens of thousands of Uighurs still live here behind hand-carved poplar doors, many in tumbledown rentals, others in two-story homes that vault over the alleys and open on courtyards filled with roses and cloth banners.

Welcome in?

The city says the Uighur residents have been consulted at every step of planning. Residents mostly say they are summoned to meetings at which eviction timetables and compensation sums are announced.

Shades of Kelo v. New London, isn’t it?

“The house belongs to us,” said Hajji’s wife, who refused to give her name. “In this kind of house, many, many generations can live, one by one. But if we move to an apartment, every 50 or 70 years, that apartment is torn down again.”

If you’re thinking in terms of 50-70 year housing, you’ll be better served in a proper structure.

“This is the biggest problem in our lives. How can our children inherit an apartment?”

Building inspectors have deemed most of the oldest homes unsafe, including all mud-and-straw structures, the earliest form of construction. They will be leveled and, in many cases, rebuilt in an earthquake-resistant Uighur style, the city promises.

Promises, promises.

High-rise housing in Kashgar

But three of the Old City’s seven sectors are judged unfit for Uighur architecture and will be rebuilt with decidedly generic apartment buildings. Two thousand other homes will be razed to build public plazas and schools. Poor residents, who live in the smallest homes, already are being permanently moved to boxy, concrete public housing on Kashgar’s outskirts.

Shades of the slums inside, in Paris and around the world.

What will remain of old Kashgar is unclear. Mr. Xu said that “important buildings and areas of the Old City have already been included in the country’s special preservation list” and would not be disturbed.

No archaeologists monitor the razings, he said, because the government already knows everything about old Kashgar.

Nice to be omniscient.

Trust me, I have your best interests at heart

Some residents say they also prefer a more modern environment.

The thousand-year-old design that gives the Old City its charm often precludes basics like garbage pickup, sewers and fire hydrants.

Charming if only visiting: donkey cart and alley rubble

Rusticity is attractive when you can go home to your gleaming downtown hotel, your ceramic bathroom, and your piping hot shower.

In Mr. Xu’s view, demolition will give the Uighurs a better life and spare them from disaster in one fell swoop.

All that said, there is a certain aura of forcible eviction about the demolition, an urgency that fear of earthquakes does not completely explain. The city is offering cash bonuses to residents who move out early — about $30 for those who vacate within 20 days; $15 if they move in a month.

By itself, that’s not so terrible, even if it smacks of the self-fulfilling blight creation of which the developer of Brooklyn’s Atlantic Yards property has been accused.

[Editorial note for Atlantic Yard junkies: Mr. Oder continues to be on a roll. Check out these posts. – Ed.]

Homes are razed as soon as they become empty, giving some alleys a gap-tooth look.

We’ve seen before that Chinese developers have what we would consider a cavalier attitude to property rights, changing facts on the ground to erode the political and topographic support for the status quo.

From sixteenth to twenty-first century: Kashgar at twilight

On Kashgar television, a nightly 15-minute infomercial hawks the project like ginsu knives, mixing dire statistics on seismic activity with scenes of happy Uighurs dancing in front of their new concrete apartments.

“Never has such a great event, such a major event happened to Kashgar,” the announcer intones. He boasts that the new buildings “will be difficult to match in the world” and that citizens will “completely experience the care and warmth of the party” toward the Uighur ethnic minority.

Spare me the care and warmth of the Communist Party, as evidenced by Russia’s public housing, which in my view contributed to Communism’s collapse.

The infomercial also notes that Communist Party officials from Kashgar to Beijing are so edgy over the prospect of an earthquake “that it is disturbing their rest.”

What does the government have in mind for the Uighurs?

Yes, slums can be breeding grounds for terrorism, but they are also breeding grounds for democracy, even in Zimbabwe, and even in China. China has a history of authoritarian government trampling property and human rights in the name of development.

We all remember the lone figure and the tank, but we forget this: Tienanmen Square’s aftermath

When, in 1523, Alfonso X of Spain demolished a chunk of Islam’s largest mosque, the Mezquita in Cordoba, to build within it the Villaviciosa and Royal Chapels his emperor, Carlos V, upon seeing the result, is said to have remarked, “You have destroyed something unique in the world and built something that can be found anywhere.”

“Something unique in the world”

While I am among those who fear infatuation with preservation leads to struldbrug buildings, neighborhoods, and even cities, we have had enough of public housing high-rises.

If it were up to me, earthquake risk notwithstanding, I’d say:

Let ancient Kashgar live.

Keep your old way of life

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Guilty or innocent?

If you are Robert Mugabe, the answer is clear: it’s slow genocide by bulldozer. 

If you’re the City of Boston in the 1950’s, the answer is likewise clear: your motives were good even if your outcomes were bad.

If you’re the City of New London in 2005, the answer is a Supreme Court landmark eminent-domain decision that ended in farce.

I’ll just take my house and walk

If you’re Mumbai in 2009, the answer is murky, where redevelopment could destroy the community like Dharavi  … and unresolved.

What about Kashgar, in Xinjiang, China, whose downtown is to be largely demolished in favor of resettlement.  Is this:

• Benevolent.  Altruistically protecting a precious microcosm from earthquake and calamity?
• Malevolent.  Cynically using the language of urban redevelopment to wipe out culture and political opposition?

Reader, it’s up to you to form your own view. 

The evidence is divided, as revealed in this New York Times article:

To Protect an Ancient City, China Moves to Raze It

Of course the Times, while pretending to dispassion, makes little secret of its sympathies, starting with its headline echoing the infamous Vietnam-Era apocryphal quote: “We had to destroy the village in order to save it.”

The town of Kashgar is unquestionably a historic treasure:

KASHGAR, China — A thousand years ago, the northern and southern branches of the Silk Road converged at this oasis town near the western edge of the Taklamakan Desert. Traders from Delhi and Samarkand, wearied by frigid treks through the world’s most daunting mountain ranges, unloaded their pack horses here and sold saffron and lutes along the city’s cramped streets. Chinese traders, their camels laden with silk and porcelain, did the same.

On the Asian side of the vast mountains dividing the formerly-Soviet stans from western China, Kashgar evokes a forgotten time.

The traders are now joined by tourists exploring the donkey-cart alleys and mud-and-straw buildings once window-shopped, then sacked, by Tamerlane and Genghis Khan.

Alley in kashgar Old Town

Now, Kashgar is about to be sacked again.

Sacking sounds the same theme of violent ravaging.

Portrait of Genghis Khan, 1226

Kashgar Uighur, 2009

Nine hundred families already have been moved from Kashgar’s Old City, “the best-preserved example of a traditional Islamic city to be found anywhere in central Asia,” as the architect and historian George Michell wrote in the 2008 book “Kashgar: Oasis City on China’s Old Silk Road.”

Sweeping the streets of Kashgar

Over the next few years, city officials say, they will demolish at least 85% of this warren of picturesque, if run-down homes and shops.

The Old Town of Kashgar

Demolition is deemed an urgent necessity because an earthquake could strike at any time, collapsing centuries-old buildings and killing thousands. “The entire Kashgar area is in a special area in danger of earthquakes,” Mr. Xu said. “I ask you: What country’s government would not protect its citizens from the dangers of natural disaster?”

A quake could well be devastating:

Kashgar officials do have good reason to worry about earthquakes. Last October, a 6.8 magnitude quake struck barely 100 miles away.

A Richter 6.8 quake could do enormous damage, as proven by the one that struck L’Aquila, Italy earlier this year, which was only a 6.3, a third as powerful:

A gentler earthquake and better buildings, but still devastating

In 1902, an 8.0-magnitude quake, one of the 20th century’s biggest, killed 667 residents.

Undoubtedly it would kill many more today, with the cities more dense.

Urban reconstruction during China’s long boom has razed many old city centers, including most of the ancient alleyways and courtyard homes of the capital, Beijing.

When their homes are destroyed, the local community will have to be relocated:

Many of its 13,000 families, Muslims from a Turkic ethnic group called the Uighurs (pronounced WEE-gurs), will be moved.

Would you live there?  Kashgar’s new high-rises

Aside from the loss of a unique historical legacy, the focus of a group calling itself Protect Kashgar old town, there’s the potential destruction of a whole community, a fragile yet sophisticated web of people that I have called, after the hardy desert plant life, cities’ cryptobiotica:

Slums are economically rational, they serve a natural market purpose within cities.  To see them as the byproducts of evil landlords or shiftless residents is to miss the point.  Slums will disappear only when the conditions that make them sensible disappear, and that is a function of government plus time.

And they serve a purpose, most particularly the purpose of forming urban society.

How?  By harnessing the wetware credit bureau, the slum community’s distributed intelligence and knowledge.

The ladies of savings co-operative Mahila Milan (Women Together)

Slums, whatever else they may be, elevate the human element above all other considerations.  Slums are people living together in unbelievable proximity, knowing about each other and holding that knowledge inside themselves.

Slum dwellers, Dublin, 1901

Urban renewal, if done badly – and it was mostly done badly – destroys that knowledge.  The community is blasted, and the results echo those in desert areas, as described by the U. S. Geological Survey:

Loss of soil also means loss of site fertility through loss of organic matter, fine soil particles, nutrients, and microbial populations in soils (Harper and Marble, 1988; Schimel et al., 1985). Moving sediments further destabilize adjoining areas by burying adjacent crusts, leading to their death, or by providing material for “sandblasting” nearby surfaces, thus increasing wind erosion rates (Belnap, 1995; McKenna-Neumann et al., 1996).

In other words, if you trample it, it dissolves into nothingness in an instant, and you cannot put it back together again.

Cobblers in Kashgar: can they ply their trade in high-rises?

Desert cryptobiotica gets crushed because it cannot speak. 

Beware the wrecking ball, my son.

Unlike cryptobiotica, people can speak. 

Mumbai: they’re against displacement

Slumdwellers can speak; in the voting booth wealth disappears.  People who live in slums are just as smart as any of us.  Even though individual slumdwellers are as nothing politically, when they join together and take control of their vote bank potential, they become a force that the highest officials respond to.

Sometimes the voice is anger and destruction. 

Watts, 1965

Just as government is a factory that produces two products (money and laws), politics is a game with two counters, money and votes.  Individually, slumdwellers can be ignored; they are effective only when collective.

The Chinese government envisions a shining new city on the hill:

In its place will rise a new Old City, a mix of midrise apartments, plazas, alleys widened into avenues and reproductions of ancient Islamic architecture “to preserve the Uighur culture,” Kashgar’s vice mayor, Xu Jianrong, said in a phone interview.

Will the new city be as compatible a home as the old?

Critics fret about a different disaster.

“From a cultural and historical perspective, this plan of theirs is stupid,” said Wu Lili, the managing director of the Beijing Cultural Protection Center, a nongovernmental group devoted to historic preservation. “From the perspective of the locals, it’s cruel.”

What will rise in its place, and why?

[Continued tomorrow in Part 2.]

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To America, from China — 1922

The Klein-bottle contortions of economic time and space between America and China are explored in an intriguing interview in Seeking Alpha:

The dollar rises in the East? Rick Newman

Think American workers have it bad? It’s worse in China.

I’ve documented this.  China’s property markets are crashing far worse than ours are – and as our recent experience shows, crashing property prices foretell a dramatic economic slowdown.

You may not know that by scanning the headlines. Late last year the Chinese government passed its own stimulus package of about $600 billion, to meet its target of 8% GDP growth. That’s right, 8%. That would be outlandish growth here, where the economy is now shrinking, not expanding.

But in China, that’s barely enough to keep a restless workforce employed. And the government might not be able to make its 8% target. Unemployment is soaring, and there’s even a possibility that economic woes could lead to angry public protests like those that preceded the 1989 Tiananmen Square massacre.

There was a flicker of decency … and then there was a massacre

Since Tiananmen, America and China have become deeply linked to each other.

In the 1960s, I remember a Piet Hein grook:

Coexistence/ Or no existence

Piet Hein: lived to be 91

Although he was speaking of geopolitics, the principle applies equally well to geo-economics.

Americans, obviously, buy a huge amount of imported Chinese goods—about $340 billion worth in 2008.

That’s a lot even in Obama-budget-deficit terms!

Much of the cash that flows back to China gets invested in U.S. government securities, which helps keep U.S. interest rates low.

As I pointed out in Filling a Sieve, capital cycles, and as we’ve seen in Slums: a wealth-extraction machine, capital always finds its best investment, and communities need continuous capital reinvestment.

I hold trillions of your paper in my red-gloved hands

That’s happening now with China, either in our debt or in equity:

China even invests directly in American firms. In 2005, Chinese computer maker Lenovo (LNVGY.PK) bought IBM’s PC division for $1.75 billion. In 2007, the Chinese government bought a $3 billion stake in the Blackstone Group, the American private equity firm.

We Americans have a habit of selling at the top J.

Historian Niall Ferguson, author of The Ascent of Money, even conflates the two nations as one: Chimerica.

Niall Ferguson at Harvard Commencement

Since the two countries are so closely linked, I asked Wei Li, a business professor at the University of Virginia’s Darden School of Business who also teaches at the Cheung Kong Graduate School of Business in Beijing, for an update on the Chinese economy, and how changes there are likely to affect the United States.  Excerpts:

How is the global recession affecting China?

The outlook for China is very grim. Much more grim than for the United States. There are two main drivers: Housing and exports.

Ten years ago there was a housing shortage in the cities. But now there’s a housing glut.

The glut exists at the market’s top end – affordability remains an enormous challenge.

One reason is there’s very little opportunity to invest elsewhere. That led to lots of speculation. It’s mostly urban. In rural areas, you still build your own house.

In rural environments, housing can be created without money, because land has minimal cash cost and you can use found materials and your own labor to build it.  Urban housing always costs money – and as we’ve seen before, the richer the society, the better its housing finance ecosystem, the longer the chunk of our future we’re willing to pledge in order to secure the home that we want.

Is the housing bust in China worse than in the United States?

Housing in China is a much bigger deal than in the United States because people just started buying. For many Chinese they were first-time homeowners.

\When tenure options are limited and housing is in short supply, such is our lust to own a home that we over-reach – and the tighter the supply, the greater the over-reach.

Prices haven’t really fallen yet, but they have to.

If they don’t let prices fall, something else has to adjust. Either the price falls or quantity adjusts. If the quantity goes to zero, nobody buys refrigerators or tiles, or hires electricians or architects.

We have to keep supply and demand in balance

The bust has been going on about one year now, and accelerated since the last quarter of 2008.

A housing price bust always precedes a big economic contraction.

Cut housing prices and watch demand shrink

What about exports?

There’s been a double digit decline. For every 1% rise or drop in U.S. consumption, Chinese exports go up or down by 10%. The effect is 10 to 1.

So with consumption down in the U.S. by about 2% or 3%, you mean that exports in China have fallen 20% or 30%?

That’s right.

Couldn’t keep up the payments

If exports are dropped, the Chinese economy will slow, and if that happens, then Chinese unemployment will rise, and with it Chinese unrest.

The unemployment rate in the United States is 8.1% right now. Is it higher in China?

According to Chinese Academy of Social Sciences (CASS), the unemployment rate in urban areas in the end of 2008 was 9.4%, significantly higher than official jobless rate of 4.0%. It’s probably higher now, since the Chinese economy experienced a marked slowdown since the last quarter of 2008. In addition, in 2009, 6.1 million college graduates are looking for jobs. These figures all underestimate the severity of unemployment in China. The unemployment stats count only jobless rate in urban areas. When rural migrants cannot find jobs, they often return home and subsist on their land.

To keep people employed, China will need to keep exporting – which may mean it’ll keep buying dollars to keep the American economy humming, so as to keep consuming the goods on which Chinese prosperity depends.

Will I keep buying your paper?  That depends, mon capitaine

Can’t the Chinese government pull the old levers of a command economy, crank up spending, and keep people employed?

That’s what people may think, but the Chinese economy is so much bigger than the government can control. If you think U.S. consumers are scared, Chinese consumers are equally scared, if not more. Stocks in China are down 60%. The new middle class who owns multiple apartments is living on a lot of borrowed money. They’re in very bad shape.

As an asset class, housing is the most resistant to price drops … but in turn, that means people become economically immobile as they cover their housing-consumption-cost deficits.

At least I’ve got security of tenure

Houselocking is a real phenomenon, one that will complicate the world’s recovery.  Rental flexibility is a strategic national resource.

Some people worry about the fact that the Chinese government owns several trillion dollars worth of U.S. government securities. You know the argument: If the Chinese sold their holdings the U.S. economy would collapse.

For the Chinese to sell, who would buy?  American interest rates would rise – and probably, American currency would inflate.  The Chinese hold so many dollars that if they sell too many too quickly, they risk killing the market for their own assets.  They’re caught in their excessive liquidity even as we’re caught in our excessive illiquidity.

Maybe I’ll even buy your uniforms, Jean-Luc

China could conduct economic warfare against America. People worry about China buying Treasuries, but for China, they don’t have a choice. There’s really no place else they can put their money. To say that China is somehow controlling the U.S. economy is laughable.

Pretend for the moment that China and America were two adjacent US states.  The one with excess liquidity would be desperately looking for a place to invest; the one with illiquidity would be desperately seeking capital.

Each of us complements the other

In global terms, China has no potential investment partner other than the US remotely close in scale and attractiveness.  And we have no liquidity provider other than China remotely close in scale and attractiveness.

Can it be that I need you, mon ami?

We need each other, whether we like it or not.

So with China in tough shape, will Chinese influence fade?

I think Chinese influence will still grow, but it has to be different. The Chinese approach used to be, speak softly and make a lot of money. That’s not working any more. The system is flawed. If China wants to continue to benefit from globalization, China needs a voice.

Might the best economic safety be rational interdependence, where each of us is stronger when the other succeeds, and each of us relies on all of us acting in our rational self-interest?

Or am I being Pollyanna?

As Star Trek’s Q himself said, “You don’t get it, do you?  The trial never ends.”

“See you around – out there!”

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Even if that’s only the first derivative, it’s worrisome

As far as my limited knowledge extends, the Chinese housing finance ecosystem appears much less complex than the US’s – and hence, much less responsive and robust.  For instance, as I posted two month ago:

China has a massive affordable-housing problem exacerbated by the long-delayed migration of rural Chinese into the cities; that, in turn, is a function of China’s antiquated land use laws and land resale policies.  The Chinese claim to be liberalizing owners’ ability to sell agricultural land, but some observers I’ve read think the reforms are mainly optical, not substantive.

The statement said rural and urban incomes would be increased.

By printing money?

This is your economy after stimulus?

Actually, printing money appears to be what they’re planning:

BEIJING — China said it will expand public housing and urged real-estate developers to cut home prices, as it tries to boost housing sales and the construction industry to support the weakening economy and avert further job losses.

Cutting prices will certainly make things more affordable, but will that revive the economy?

Prices are “still not affordable for ordinary people,” four government agencies said in a joint statement. “The key to revitalizing the real-estate market is to set reasonable prices,” the housing ministry, finance ministry, central bank and the National Development and Reform Commission said.

Set reasonable prices? 

Why didn’t I  think of that?

To be sure, that’ll make things more affordable, but is the problem affordability – or illiquidity?

At a news briefing on Tuesday, officials said the government will build more government-subsidized and affordable housing.

That’s certainly nice – but adding supply will actually decrease demand and will not make existing housing any cheaper.  Prices have to fall.

Maybe not literally

Officials didn’t offer new ideas for boosting sales, which have been falling together with house prices in recent months.

Like the rest of the world, China is not immune to the global de-leveraging. 

The downturn in the housing market has had broad ramifications in China as builders’ demand for steel, copper and other raw materials shrinks, and consumers buy fewer appliances and electronics.

My demand for you is shrinking

As de-leveraging reduces the velocity of money in circulation, the economy has to slow down.

Official forecasts still call for China’s economic growth to ease to about 8% this year, but some private economists worry growth could be much weaker if the housing market doesn’t recover.

In most economies, housing – especially new housing production – is a major economic driver, because housing is so capital-cost intensive.  Building more houses booms an economy. 

“The healthy growth of the property sector is very important for the economy’s healthy growth, for fostering consumption and for improving people’s lives,” Huo Yingli, deputy director of the central bank’s financial market department, said at the briefing.  Government data show the construction industry employs around 9% of the urban work force.

Failing to sell built houses brings it to a screeching halt.

Where’d the buyers go?

As has now happened to China:

Housing sales in the January-November period were down 20.6% from a year earlier, and prices have been falling at an increasingly rapid rate as developers accelerated price cuts beginning in mid-October. Prices in November were down 0.5% from October, compared with a fall of 0.1% in August.

In terms of affordability, stand up and cheer.  While in general home prices are always at an equilibrium just at the fingertips of one’s financial grasp, when there is sudden oversupply, due to collapse of demand, large pockets of temporary affordability open up. 

People walk past an advertisement for a luxury housing project in Beijing.

This happened to California and Texas during the early 1990’s (post-S&L bailout), and is happening in several places – like Las Vegas, Miami, and California’s Inland Empire – now. 

The government on Tuesday praised such price cuts for having had some effect in boosting sales. But officials worry that too much of China’s population is priced out of the commercial housing market. So the government will add 1.3 million affordable housing units each year from this year through 2011, according to Tuesday’s statement.

While I’m skeptical of future-tense verbs, this sounds less like a housing-affordability strategy and more like a public-works program.

Great Depression: the Civilian Conservation Corps building national parks

“The government’s aim now is to maintain stable public sentiment,” said Chen Zhi, chairman of Shenzhen-based real-estate developer Causeway Bay Group. “On the one hand, they don’t want property prices to fall sharply. At the same time, they want to deal with the fact that property prices are still too high for most people. So they choose subsidized housing as a measure to tackle this problem.”

Even allowing for translation imprecision, this sounds impossible.  To keep prices high, you need people to buy.  But to get more people to buy at higher prices, you need to stimulate demand – either with earnings or with favorable lending.  If you add need affordable supply, you undercut that demand pressure.  That’s great for the lower-income households, and probably good for China long-term (affordable housing is good for healthy societies) – but in the short-term, it’ll exacerbate the price drop.

There are concerns that the increase in public housing will divert buyers from commercial housing projects.

Further, Chinese housing prices do need to drop.  Markets have to clear; the longer clearing is blocked, the harder the landing.

Should have adjusted altitude earlier

Qi Ji, vice minister of housing and urban-rural construction, said at the briefing that the government’s projects target the poor and won’t hurt the commercial housing property market.

Of course that’s utter nonsense.  Housing finance and occupancy are an ecosystem, and in an ecosystem, everything affects everything else.

The only silver lining?  Because new construction takes a while to get to occupancy, there may be job creation and capital expenditure/ investment long before there’s any relief on the housing-affordability front.

If that’s your definition of a silver lining …

Silver lining?  Hmm …

Joan Wang, senior manager of the Research & Consultancy department of Savills Property Services (Beijing) Co., said housing sales are unlikely to pick up quickly because of the dimming economic outlook, unless the government introduces measures such as allowing buyers to deduct their home purchases from income tax.  [Presumably they mean interest on such purchases – Ed.]

In his farewell address, outgoing Treasury Secretary Hank Paulson touched the third rail of politics, suggesting that the US rethink its incentives for homeownership.  He can do that because he’s departing and no one takes his pronouncements as having any political relevance.  Here’s the flip side – an industry desperate to prevent a price implosion proposing an incentive that, however short-term its origins, could be with the nation forever. 

Beware of t he … mortgage interest deduction?

But a finance ministry official signaled that new tax incentives are unlikely in the near term.

Finance ministries always say that sort of thing.

The government has already cut mortgage rates and transaction taxes, and new measures announced last month will exempt more people from paying property-sales taxes.

Policy theorists take note – the quickest and easiest stimuli are cuts in taxes, because the money is already in people’s pockets.

Wang Xiaohua, a deputy director of the tax department of the ministry of finance, said the government will examine the effectiveness of moves in 2008 before taking any further action.

Finance ministries always hate giving up revenues.

Analysts say the government’s measures suggest it is more focused on boosting housing sales and construction activity rather than supporting prices and developers directly. But the government is also looking for ways to ease the financing squeeze faced by many property developers.

The State Council announced a trial program last month that would let developers form real-estate investment trusts to raise funds.

Fine, fine.  REITs are good – they’re an efficient form of long-term ownership of income-producing real estate – but seem a useless initiative here.  The properties in question aren’t producing income, they’re assets held for sale.

Ms. Huo of the central bank said government agencies are discussing a plan to launch the trial and will send a proposal to the State Council after discussions. She didn’t provide a time frame.

I think we can fairly say it’ll be too late.

China’s property market is in mid-crash.

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You can’t boom an economy without breaking vases?

If capital is global – and it is – then, in the words of a Miami Vice villain, “When we sneeze?  Everybody — catches cold,” and no other nation has more invested, financially and otherwise, in the US economy’s health, than China.  And, if Forbes [September] is to be believed [Usual don't-believe-everything-you-read-in-the-paper warnings apply – Ed.], the crumple has already started:

We ran into a little problem

If you’re looking for good deals on housing, check out China.  The country may be entering a period depressingly familiar to Americans

The sales hall at the Oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents announce that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But a few hundred feet behind the sales hall some of the “almost completed” buildings look like neglected, hulking shells.

Houses need occupants like human beings need oxygen.  Look at the lifelessness of a vacant property and it would make one believe in a soul like a ghost whose spirit departs the body.

Maybe I can breathe life into them

Construction workers idling nearby say they haven’t been paid in five months. Prices have been slashed from $95 per square foot to $55. Market experts estimate that as few as 300 units have been sold out of the first 2,000 put up for sale.

For any large development, the interval from completion through occupancy – whether rental or ownership – is its most vulnerable time.  Like a show jumper clearing a fence, a property leasing up or selling out has a fluid grace when it succeeds, and crashes in confusion when it doesn’t.

Let’s try that sellout plan again, okay?

A property that’s 15% sold isn’t jumping, it’s thrown its rider.

Sounds like another sad-sack Florida condo development, yet this scene is in the northern Chinese industrial city of Shenyang. Over the last five years real estate prices in China, in dollar terms, doubled on average to $50 per square foot and the country added 20 billion square feet of new residential property. But the once seemingly limitless real estate boom is going into reverse.

I think it’s time for us to back up

In fact, the decline is already rapid:

Home sales dropped by half in June from a year earlier in Shanghai, Shenzhen, Guangzhou, Chongqing and Chengdu, according to data compiled by JPMorgan. Conditions are worst in southern China, where undeveloped parcels are going unsold and home prices are expected to continue falling despite a drop of 40% from last autumn in some neighborhoods. Now the market malaise appears to be spreading northward. If not for an Olympic boost, Beijing’s market would be weak, too. “We’re entering a bust now,” insists Andy Xie, an Asia economist and bear on Chinese property.

This is your economy after a credit crunch

Certainly the Chinese government thinks so, as shown by the massive stimulus package it announced in early November.  As reported [November 9] in Yahoo Finance:

China unveils $586 billion stimulus plan to fight effects of global meltdown

BEIJING (AP) — China unveiled a $586 billion stimulus package Sunday in its biggest move to inoculate the world’s fourth-largest economy against the global financial crisis.

Does anyone other than me have the sense that finance ministers are playing “my bailout’s bigger than yours”?  The $586b figure, at any rate, is not well spelled out and may include a repackaging or refreshment of previously committed funds:

The Cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government’s Web site said.

Some of the money will come from the private sector.

A curious formulation; if coerced from the government, then it’s not really private; and if it’s from the private sector, then how can the Chinese government claim credit for it?

It’s easy enough for me to see how!

The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

The same way, I suppose, that the government can re-label existing spending and present it as new.

China’s export-driven economy is starting to feel the pinch of weakening U.S. and European economies, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

As I’ve written in Recap’s State of the Market 11, The Pileup in Slow Motion, de-leveraging occurs across all asset classes or not at all, and as chronicled in State of the Market 13, Happy Thanksgiving, 2009!, this process is sequential and lengthy.  Exporting nations are no more immune than importers – arguably they’re more dependent, since their income derives from getting us to pay high prices that we can afford only so long as credit is generous and interest rates are low.

Economic growth slowed to 9% in the third quarter, the lowest level in five years and a sharp decline from last year’s 11.9%.

Most of the world would think 9% annualized economic growth cause for wild celebration.

9% growth!

For China, which is racing to catch up from the Great Leap Backward and the Cultural Devolution, it’s a slowdown.

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Another way of viewing the same problem is that in terms of a recession it’s not the rate of growth per se but rather the total illiquid assets in the development pipeline.  As the Forbes piece shows, China went hog-wild in development, with lending practices that would make Angelo Mozilo’s hair stand on end:

What loan-to-value ratios?

Last year the People’s Bank of China toughened the requirements for non-first-home mortgages, punishing speculators and the builders who were selling to them. (First-home mortgages became easy to get this decade and have stayed that way, and until recently rising prices shielded borrowers from the unfamiliar nightmare of negative equity.)

China, with its hyperactive real estate markets, took staggering percentages of its newfound dollar wealth and plowed them into high-rises and cranes — unfinished assets whose value will not be liquid again until they are complete and occupied.

Exports have been growing at an annual rate of more than 20% but analysts expect that may fall as low as zero in coming months as global demand weakens.

Exports bring cash.  For China, a world short of cash could be a catastrophe in their development pipeline.  It’s already bludgeoned their equity prices:

Many publicly traded property companies have lost more than two-thirds of their market value since their fall 2007 peaks, initial public offerings have been put off, and companies that indulged in fevered land-buying sprees now find themselves overextended and thirsting for cash. The developer of that 23-million-square-foot Oasis project, Hengda Real Estate Group, known in English as Evergrande, aborted a $2.1 billion initial public offering at the last minute earlier this year.

IPO’s also provide cash.  Busted IPO’s are a warning signal.

Warning, great Depression ahead

Saddled with a reported $1.5 billion in debt to banks, Hengda instead had to drum up $500 million in financing in June from Merrill Lynch, Deutsche Bank and other investors. The company insists that its operations are normal but declines to provide numbers.

All our operations are normal

China’s statement said the Cabinet, at a meeting chaired by Premier Wen Jiabao, had “decided to adopt active fiscal policy and moderately easy monetary policies.”

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing — an urgent need in many parts of the country — as well as increased spending on rural infrastructure.

China has a massive affordable-housing problem exacerbated by the long-delayed migration of rural Chinese into the cities; that, in turn, is a function of China’s antiquated land use and land resale policies.  The Chinese claim to be liberalizing owners’ ability to sell agricultural land, but some observers I’ve read think the reforms are mainly optical, not substantive.

We’ve put it back together

The statement said rural and urban incomes would be increased.

By printing money?

This is your economy after stimulus?

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