Why May Unconstrained Power Disrupt the China’s Miracle? /Sheng Hong

It is said that in many cities, such as Suzhou, Taiyuan and Kunming, and so on, house prices fell; the cities where houses prices fell more than 3% includes Kaifeng, Handan, Fushun and Dezhou. As an overall trend, China urban housing price 288 index in August 2021 issued by China Real Estate Evaluation Center shows that the new house price index fell by 0.09% month on month, which is regarded as the first decline after rising for seven consecutive months. This is obviously not accidental. Prior to this, there were precursory data. According to the National Bureau of Statistics, from January to August 2021, the land area and price purchased by the real estate industry continued to decline, with a year-on-year decrease of 10.2% and 6.2% respectively in August. Land is the main “raw material” of real estate. The decline in price and quantity is obviously an important reflection of the decline in demand in the real estate market. This is a major omen for China’s economy.

It’s a long story. Nobel laureate Lewis said that the development of modern economy depends on industrialization and urbanization. Not to say industrialization, only say urbanization, which brings huge demand and power to economic development. Due to the implementation of the planned economy for many years, China’s urbanization rate decreased from 19.8% in 1960 to 17.9% in 1978. After the reform and opening up, especially after the second half of the 1990s, urbanization has made great progress. Urbanization has not only brought huge investment, but also accelerated the expansion of market system and demand due to the improvement of agglomeration degree, greatly improved the efficiency of financial, commercial and other service industries and the industry, greatly increased the income of farmers in cities due to their shift of industries, and permanently increased the demand due to the convenience of shopping, The prosperity of industry and the influx of residents promote the further demand for urbanization, which leads to a virtuous cycle of mutual promotion between urbanization and industrialization. By 2020, the urbanization rate has reached 64%. It can be said that China’s rapid and sustained economic growth after the Reform and Opening Upmainly depends on the process of urbanization.

To realize urbanization, we need to invest in urban infrastructure and urban service functions. This requires huge investment. In this regard, it is a key reform for the urban government to sell the land multi-years use right in the form of lease and marketize the factor of land. After years of evolution, a relatively mature land financing and operation mode has been formed, that is, the government uses land as collateral to obtain bank loans, the bank lends funds based on the appreciation expectation after land urbanization, the government uses loans for primary land development, and then sells land to developers in the form of bidding, auction and listing, so as to obtain appreciation income and repay bank loans, And further land development. Developers can also borrow money from banks with the purchased land as collateral, then carry out secondary development, and finally sell commercial houses, office buildings, commercial facilities or industrial plants to earn income and repay the loan. Ordinary consumers obtain bank loans with their purchased houses as collateral, and then repay the bank loans in installments over the next ten years or decades.

This financing model not only makes the urbanization process smoothly, but also constitutes an important part of the current economy. According to the estimation that the existing urbanization rate increases by an average of 1.4 percentage points per year, China’s new urban population is about 20 million every year. The resulting huge investment in urban municipal infrastructure is about 2.5 trillion yuan in new urban areas every year; if it increases by 5% a year, it will be 6 trillion by 2035. This is obviously the largest single industry investment and is stable and sustainable.

Figure 1 growth of municipal infrastructure investment (100 million yuan)

In a broad sense, in 2017, the total investment in infrastructure around urbanization, including transportation, storage and postal industry, water, electricity and gas production and supply, water conservancy, environment and public facilities management industry, resident services and other services, education, medical treatment, culture and sports, public management and social organizations, and construction industry, was about 21.5 trillion; If commercial supporting urban service functions are considered, including wholesale and retail, accommodation and catering, finance, leasing and business services, the total investment is about 3.7 trillion; The investment in real estate is 14.6 trillion. These investments add up to about 40 trillion yuan. It accounted for 62% of the fixed investment of the whole society in that year. Such huge investment funds, coupled with operating funds, make the demand for urbanization constitute the largest part of the financing of China’s financial system. According to China Financial Yearbook 2019, in 2018, the bank loans of the above industries around urbanization reached 66783.8 billion, accounting for 48.2% of the total loan balance of the year. According to the National Bureau of Statistics, in 2020, the proportion of industries related to generalized urbanization in GDP is conservatively estimated to be about 48%.

Figure 2 infrastructure investment in generalized urbanization in 2017 (100 million yuan)

As mentioned above, the financing mechanism to realize such a huge investment is a financing mechanism based on land mortgage and financial marketization. There are two main points. One is that the land price must continue to rise, and the other is that the financing cost must be determined by the market. Now it seems that the price of the land market has begun to decline, and the first key point no longer exists. For banks, as long as house prices fall, the collateral value of their loans will be lower than the loan amount. Once borrowers default, banks will face losses. For developers, the decline in house prices means that the market prospect is bleak. According to the existing costs, they will reduce profits or losses, and lack the power to continue investment. For local governments, the decline in land prices caused by the decline in house prices will also make them unable to repay bank loans and even bankrupt their finances. Especially in these years, the bank’s estimation of land value is based on the expected appreciation of land. For example, in 2014, the average mortgage loan per mu of land was about 1.4 million yuan, while the price of land sold in the same period was about 1.29 million yuan per mu (calculated according to the data of Yu Jingwen, Wang Min and Guo Kaiming (2019)), and the bank’s valuation of land was higher than the land price in the same period. Once the land appreciation is lower than the loan interest rate, the local government will be unable to repay the loan.

The decline in land prices is due to the reduction in the final demand for real estate, and the most sensitive real estate developers began to have problems. Evergrande real estate, a behemoth, has begun to have a debt crisis. It is said that the debt is as high as 1.9 trillion. In the face of the slowdown of the real estate market in 2021, “commercial bills are overdue every day, bonds are stopped from financing business, and 60% of staff are laid off, The two trusts require early repayment of loans”; Many large developers have also been insolvent, such as Huaxia happiness, “the principal and interest of default debt totaled 87.899 billion yuan”; Xinhualian, “the total book value of assets mortgaged, pledged, sealed up, seized and frozen in case of debt default is 45.458 billion yuan”; Hongkun real estate, “the operating cash flow has been cut back, the financing cost is high, the financing environment continues to deteriorate, and the debt pressure and liquidity problems begin to appear”; Field Real Estate, “large scale commercial bills overdue”; …… There are still about 25 similar-level developers to be insolvent (Longitude and Latitude Observation, 2021). As of July 20, 203 real estate developers had submitted bankruptcy documents. The debt problems of these real estate developers are obviously related to the bleak prospects of the aforementioned real estate market.

This is only the prelude to the decline of the whole land market, leading to the plight of the financial system mortgaged by land. Then there will be many local governments facing debt crisis. In the environment of unrestricted power, their first thought is to cut more income and wealth from enterprises and residents, such as levying taxes in advance, squeezing more funds and assets from private enterprises, forcibly demolishing the so-called “small property right” houses under the banner of “planning”, and then developing and selling the robbed land, Enterprises have no incentive to continue production and investment, and the people have reduced their willingness to buy houses because of the lack of protection of property rights and housing rights; The economy will decline further and the land market will worsen. Financial institutions based on land financing will also have a crisis, a large number of bank loans can not be recovered, and there will be a large number of losses. Due to the chain reaction, a large number of debts cannot be repaid, causing the money supply to contract on a multiplier scale. At this time, the central government has only one way to save the current crisis, which is to print more money, but it will lead to inflation. This, in turn, will hit the real economy, which will eventually disintegrate the strong momentum of China’s economic development since the reform and opening up, resulting in economic recession.

The key to the problem is the decline in land prices. How did this happen? Some people say that China’s urbanization has been nearly completed, and the huge investment demand brought by urbanization has decreased. This may have some impact. However, China’s urbanization rate of 64% is far from reaching the level of 90% in European and American countries. Although China’s actual situation will be higher than the figure according to the degree of population agglomeration, it may be lower than this figure in terms of urban infrastructure construction. There is a serious lack of infrastructure construction in rural and small towns with large population agglomeration in China, so it should be said that there is still a lot of space. Judging from the increase of urbanization rate of 1.4 percentage points per year, the urbanization process should take about 20 years. I once estimated that as long as the urbanization process is not completed, China still has a basic growth rate of 5 ~ 6% per year (Sheng Hong, 2019). So what is the reason for the decline of the land market?

We know that urbanization is not only because there is room for urbanization, but also because of the degree of marketization and the rate of economic growth. In the period of planned economy, China’s urbanization rate is very low, but it continues to decline, because urban development does not rely on the power of market mechanism, but the will of the planning authority. At the same time, it is subject generally to the misallocation of resources and lack of incentive in the planned economy. Urbanization is to realize people’s agglomeration under the market system, and people’s agglomeration brings the externality of the market network, that is, the transaction dividend increases much faster than people’s agglomeration, which is the basic principle of urbanization. Market system is that people’s economic decisions are not subject to external control and made according to their own costs and benefits, which is manifested in the migration of enterprises and residents to the center of agglomeration, so as to further promote urbanization. Professor Krugman, Nobel laureate, pointed out that one of the characteristics of modern industrial development is that large-scale production is manifested in agglomeration in space (M. Fujita, Krugman et al., 2005, page 70), that is, in the form of urban development. Those producer services, such as finance and information, are in the form of urban agglomeration. In other words, industrialization and urbanization promote each other in economic development.

From the first half of this year, the economic data is still good. According to the National Bureau of Statistics, GDP grew by 13.6% in the first half of the year, which also reached 3.4% calculated by Keqiang index. According to the data compiled by Dacheng Research Institute, the operating revenue of national industry increased by 25.6% from January to July; The total investment in China increased by 10.3%, and the total export from January to August increased by 33.7%. Since the economic development situation is so good, how could there be a bleak prospect of the real estate market and a decline in land prices? The problem is that among the variables affecting economic development, some are fast variables and some are slow variables. Now the slow variable changes, but there is no time to show the current results. These slow variables are the basic economic institutions. Basic economic institutions refer to property rights institution, contract system and market rules. Douglass North and other institutional economists have long pointed out that these basic economic institutions are the main reason for economic development since modern times. Mancur Olsen pointed out that “as long as a trusted and strong government exists for a long time in the economy and protects individual property rights and contractual exercise rights from infringement, it will be able to reap all potential benefits from investment and long-term transactions” (2009, P. 409)

As for the property rights institution, in recent years, the property rights of enterprises and residents have been violated from time to time, and there is no channel for legal relief. Even the personal safety of entrepreneurs can not be guaranteed. They are often maliciously trapped by the local government and use judicial means to make unjust cases. For example, the Sun Dawu case was clearly a land dispute between Dawu Group and a nearby state-owned farm, which was first provoked by the state-owned farm. However, he was trapped to various charges and sentenced to 18 years’ imprisonment. Another example is that Hubei Xiangda Group took over a chemical plant on the verge of bankruptcy under the guidance of the local government, but the company’s leadership was labeled as a “underworld” due to employee petition (Si Qipu, 2021), and so on. The property rights of ordinary citizens are posed a serious threat due to the prevalence of illegal demolition. In violation of constitutional principles, some administrative departments improperly elevate the so-called “planning right”, so as to deny the constitutional rights of citizens such as housing right, property right and residence right. In recent years, some local governments ignore the restrictions of the Constitution, do not recognize the policies and commitments made by the central and local governments, violate a series of administrative laws and abuse public violence. In 2019, there was a bad situation of driving out the “low-end population” in Beijing; In recent years, there have been a large number of illegal acts of forcibly demolishing residential houses in suburban districts and counties of Beijing, Hebei, Shandong, Hainan and other provinces and cities.

Property rights not only refer to the material object, but also a group of rights. When the assets as objects are not damaged or less damaged, the restriction and damage to rights are also violations of property rights. For example, Beijing demolishes advertisements on houses in the name of sorting out the skyline, and the greatest damage to advertisers is the forced deprivation of advertising rights. More generally, the interruption of contract execution makes the contractor lose the benefits obtained from the contract, which is equivalent to the infringement of the property rights protected by the contract. For example, the administrative department suddenly closed a large number of farmers’ markets, and the lease of the majority of vendors did not expire; The administrative department suddenly announced that it would not allow out of school training, limit the time of video games, close private primary and secondary schools, and increase the entry requirements of home stay in Beijing. All these are interrupting the performance of the contract of market subjects, which actually infringes on the property rights of these market subjects. If the constitution is regarded as a social contract signed between the people and the government, the administrative departments arbitrarily intervene in the market, infringes on the people’s property rights, and suddenly changes the policy without explanation, it is also a violation of the social contract, resulting in more extensive property rights losses caused by breach of contract.

Of course, administrative departments have their own reasons for intervening in the market, interrupting contracts, and then infringing property rights. For example, for out of school training, they use the excuse of “reducing students’ extracurricular burden”; Limit the time of online games under the pretext of “preventing students from indulging in games”; Stop the enrollment of private primary and secondary schools under the pretext of “adjusting the proportion of private public schools”; Beijing home stays were off from the shelf online, under the pretext of “safety” These excuses seem to have their reasons. However, things in the world are not one side, and any “good” purpose has a price. Therefore, there is what Ronald Coase calls “reciprocal nature of the problem”, that is, “reducing pollution” is a good thing, but in order to reduce pollution, it may increase the cost of production; From a social perspective, both increasing production costs and pollution are social costs, and the choice depends on which is higher or lower. Second, it depends on whether the government should intervene in the solution of these problems. If other methods, such as family, market and non-profit institutions, can be used to solve these problems, it is better than the government’s method, because these alternative methods are non mandatory. Mandatory not only has high implementation cost, but also is easy to go too far due to lack of compromise, resulting in negative results.

Finally, even if it is to be done by the administrative departments, there is a problem of whether they follow the due process of law. First, before issuing a policy or administrative order, the administrative departments should have a constitutional and legal self-examination, and carefully consider whether the policy or order violates the previous policy or commitment. The behavior that causes the losses of economic parties should be avoided, otherwise they should be compensated. When the administrative departments believe that it is really necessary to introduce policies involving the rights of citizens or enterprises, it should fully explain the reasons and obtain the consent of the legislature. In the process of implementation, we should follow the administrative procedures stipulated by law, hold hearings, listen to the opinions of experts and the public, listen to the arguments of the parties, and give buffer time. Only in this way can we ensure that the policies or orders of the departments do not violate the Constitution and laws, do not conflict with their previous policies or orders, ensure the logic and stability of the behavior of the administrative departments, and give people reliable expectations. I am afraid that the abrupt and arbitrary behavior of the administrative departments is the result of listening to the instructions of some individual leaders or simply “guessing the will of leader”. It simply does not take the Constitution, the laws and its own commitments as one thing.

This requirement for the administrative departments is a bottom line requirement. This is true not only in most countries ruled of law in the world, but also in traditional China. If an arbitrary emperor wants to issue an imperial edict, he also need to draw up a draft first, so that the Zhongshu department can draw up an imperial edict. If the Secretary in Zhongshu Department found any problem with the draft, he has the power to put forward modification opinions and return it back, which is called “closing and refuting”. Su Shi did closing and refuting six times when he was a Secretary in Zhongshu Department. Even if it passed the Zhongshu Department, there is still Shangshu Department for inspection. In Song and Ming Dynasties, it needed the Prime Minister or the head of the cabinet to countersign. It is said that the stubborn Zhengde Emperor of Ming was whimsical. Because “pig” and “Zhu” in Chinese were homonymous, he suddenly issued an order not to allow people to eat pork. After Yang Tinghe persuaded him to repent, he didn’t know how to take back his order. Later, it was found that the order was issued not in the name of the Emperor but in the name of “powerful general” because it was unable to obtain the head of cabinet signature, let him get out of the dilemma. Although this system is not perfect, it ensures that absurd and contradictory orders will not appear easily.

According to the Constitution, actions affecting the basic economic system must be approved by the legislature. Infringing on the market field is a move to change the basic economic system, which is a violation of the constitutional principle of “market economy”. The administrative departments of the government attempt to create such a fact by its wanton intervention in the market, it can grant itself the power to violate the Constitution and expand itself without the consent of the legislature. What is even more frightening is that the administrative departments of the government regards this behavior as a matter of course and routine. If they continue to issue the so-called policy of restricting or prohibiting the entry of this or that industry without scruples and constraints, it will destroy industries in the market without warning, and even conduct to stop power in sneak-attack style or similar behavior, which will not only affect the technical reduction of production, but also increases the uncertainty caused by the unpredictable behavior of the government. Because people can’t predict the government’s behavior according to the Constitution, laws or its own commitments, all industries in the market are always under the threat of its willful behavior. There is no stable expectation, which greatly increases the cost of preparedness or suffers losses, resulting in enterprises choosing to reduce production or even stop production.

The uncertainty caused by the government’s failure to comply with the Constitution, laws and previous commitments is a kind of uncertainty of institutional environment and policy environment. On the one hand, it is all-round, including various means of government intervention in the market, such as restricting prices, directly restricting supply, directly restricting demand, restricting income, restricting industrial entry, restricting consumer entry, and even directly confiscating assets; On the other hand, these behaviors are not limited to specific industries, but may cover all industries. In addition, this uncertainty is called “immeasurable uncertainty” by Knight, that is, “uncertainty of unknown probability distribution”, which corresponds to the “uncertainty of known probability distribution” of risk (2005, P. 172). For the latter, people can also adopt “specialization” and “integration” methods to reduce risks (2005, P. 176); There is nothing we can do about the former. Therefore, the uncertainty caused by the lack of rules for government behavior is a general environmental uncertainty. Of course, it will bring losses to people at present. More importantly, it has a possibility of damage to people’s future behavior. Aware that future plans may encounter such damage, people will increase the estimation of costs, resulting in the potential investors stay back and the innovators could not focus. This is a bigger negative factor than direct infringement of property rights.

With regard to the protection of property rights and the maintenance of contractual rights, Olson said, “the court system, independent judicial power, and respect for legal and individual rights are also needed to ensure property and contractual rights.” (2009, P. 409) Therefore, a fair and neutral judicial system is important. However, this is what our society lacks, and it is increasingly lacking. What we see is that the judicial trial of unjust cases of entrepreneurs is obviously unfair and wantonly violates the due process of law. For example, in the trial of Dawu case,  it refused Sun Dawu to obtain a guarantor pending trial without justified reasons, abused residential surveillance, and tortured the parties with various illegal means, so that Sun Dawu described it as “life is worse than death” (Wu Lei, 2021), but refused to exclude these illegally extracted testimony from the evidence in the trial, which seriously violated the “no forced self incrimination” in Chinese legal principle; They also ignored the evidences of the defense and convicted them without solid facts and legal basis. Compared with the unjust cases caused by the carelessness of the court and technical reasons, this malicious framing and unjust imprisonment makes entrepreneurs more afraid, because once they offend the local government, they may suffer such retaliation, which entrepreneurs can’t escape and bear.

For the illegal demolition of residential buildings, when the residents receive the notice of demolition threat, they file an administrative lawsuit or administrative reconsideration with the relevant authorities, but they will not be accepted; The local administrative authorities flagrantly violate the provisions of the administrative enforcement law that “the parties do not apply for administrative reconsideration or bring an administrative lawsuit within the legal time limit and do not dismantle” to allow forced demolition (Article 41), and still illegally demolish after the forcibly demolished residents apply for administrative reconsideration or administrative lawsuit; In addition, in violation of Article 43, “administrative organs shall not enforce administrative enforcement at night or on legal holidays.” in the process of illegal demolition, they abuse police power to threaten the personal freedom and safety of victims, illegally employ demolition elements with financial funds, illegally cut off water and power supply, etc. (Sheng Hong, 2020). After the forced demolition, the relevant administrative departments ignored the huge losses and injuries of the victims, insisted that the forced demolition had “no interest” with the victims (Sheng Hong, 2021), refused to accept the administrative reconsideration or administrative litigation of the victims, and put the injured residential owners in a situation of no legal relief at all.

Some people may say that some cases of infringing on private enterprises account for only a small proportion of private entrepreneurs. Although there are many illegal demolitions in recent years, and the number of houses demolitions is huge, it only accounts for a small proportion of the total. However, an infringement of property rights does not have an impact only on a proportional level. Because property rights are a fundamental economic institution and the most important interest for individuals or enterprises, the infringement of property rights is a fundamental psychological impact. The value of an asset is not only determined by its use value, but also affected by the security of its property rights. For example, there are two physically identical houses, one in New York and one in Gaza, which are different as heaven and earth. I remember that John Commons, the author of Institutional Economics, said that for each individual, only the institutionalized mind can form a judgment on the future (1983, P. 297), which will change with the facts he knows. After Xiangda’s “underworld related” case, the daughter of the chairman issued an open letter asking for the enterprise to be donated to the government (Si Qipu, 2021), which shows that she not only despair that the government can protect property rights, but also regards property rights as negative values. In a questionnaire survey in 2016 / 2017, entrepreneurs believe that they have a 26.8% probability of property safety risk. Now this probability should be higher, the assets will depreciate accordingly, and the land as an integral part of the assets will depreciate equally.

In my article “why the rule of law is a first-order macro policy”, I pointed out that the security of property rights is much more important and more priority than the adjustment of interest rate or tax rate. Generally speaking, the asset value is calculated by discounting the future return of the risk-free interest rate. If the risk-free interest rate is 4%, the asset value is 100%. When the risk of infringement of property rights increases by 10%, it is theoretically equivalent to raising interest rates or tax rates by 10 percentage points. Although the government sometimes introduces new opening policies or expansionary macro policies, both of them are mainly in the form of reducing interest rates or tax rates. As mentioned above, this can not be compared with the threat to the security of property rights and the certainty of institutional-policy environment. Moreover, when the administrative departments interrupt the performance of the market contract, the loss will not only be the benefits covered by the contract at that time, especially when the whole industry is blocked and employees are unemployed, which will cause huge losses to the long-term investment of investors and employees in providing products or services. This kind of investment has what economists call “asset specificity”. Once it cannot be used in the specialized production or service that has always been used, its value will be greatly reduced. For example, once an English teacher can no longer teach English, the value of his or her human capital of English ability will be greatly degraded. If the material or human capital is depreciated, it means that the efficiency of resource allocation is significantly reduced, and the land carrying resource allocation is also depreciated.

The influence process of institutional variables is slow, and there will be no obvious signs in the initial stage. The changes of fast macroeconomic variables, such as interest rate, tax rate and reserve ratio, are relatively clear and directly enter people’s calculation, so the impact is also direct and rapid. For example, the change of interest rate directly affects the financing cost, and then affects the profit. And the policy variable is short-term, it can also change in the opposite direction. The impact of institutional changes on specific individuals or enterprises is only a possibility, but institutional variables will enter people’s judgment of the future in the form of probability and affect their long-term expectations and decisions; And unless there is a major political change, the change of system is usually irreversible, at least it is difficult to change again, so it has a long-term nature, which will affect the estimation of asset value. When there are more and more such cases, people’s evaluation of their own property rights will be reduced, their belief in the performance of the contract will be weakened, and their expectation of obtaining legal relief in case of infringement by the administrative department will be reduced, which will reduce the evaluation of asset value, which is the institutional reason for the reduction of land price. When there are both fast variables and slow variables in a society, the impact of fast variables will appear at the moment, while the impact of slow variables will appear later.

Moreover, due to the control of public opinion, most people know little about those cases of infringement of rights, or think it has nothing to do with themselves. At present, the reason why the macroeconomic data are not bad depends on the institutional foundation laid by Reform and Opening Upand the accidental factors brought by the epidemic. Macroeconomists only see these macro data and put forward policy suggestions based on classical theories. Even if they see some problems, they only suggest adjusting some policy variables, such as interest rate, tax rate, or open market business; If macro decision makers only make macro decisions based on these macro data and accept the suggestions of macro economists, and do not see the situations related to specific individuals such as damage to property rights, forced breach of contract and unemployment reflected in these cases at the micro level, they will continue to ignore the institutional problems reflected in these cases and go towards the coming crisis  in the illusion of “the situation is very good”. These seemingly good macro data are the reason why they make wrong decisions. They continue to believe that it has nothing to do with not restricting power and infringing on the rights of some citizens. They even think that they are right to do so, which can only aggravate the deterioration of institutional variables and worsen the potential recession.

The willful violation or violation of the Constitution or rights begins with individual cases. Any individual or enterprise is weak in front of a strong government. But as Erasmus said, “even the most powerful monarch cannot afford to provoke or despise even the most humble enemy.” (2003, P. 17) the institutional impact of these cases is not individual, but throughout the whole society. As long as such cases continue to increase, the consequences will eventually appear slowly and steadily. Moreover, now it is not only a case, but has been extended to the elimination of one and another whole industries. For example, the ban on out of school training is said to have led to the unemployment of 10 million teachers (small tax, 2021), the closure of private schools has led to the unemployment of more teachers, and the sudden removal of all Beijing home-stay hotels from the shelves has caused significant losses to thousands of home-stay-hotel owners. These situations have a scale that affects macro data. Since the second half of this year, the economic growth rate has decreased month by month; In August, industrial growth decreased by 1.2% month on month (Fan Gang, 2021); GDP grew by 4.9% year-on-year in the third quarter, much lower than 13.6% in the first half of the year. Economic slowdown will directly hinder the process of urbanization and further reduce land prices, thus disintegrating the core mechanism of the existing financial-fiscal mechanism, and the financial crisis is coming. This will have an impact on the real economy and make the whole economy fall into stagflation. The recession won’t be far away. Maybe within two years.

It is right forever that property rights institution, contract rules and rule of law are as the basic institutional structure of economic development. The miracle of China’s 40 years of Reform and Opening Up is mainly the result of establishing and protecting the property rights institution, carrying out market-oriented reform and promoting the rule of law. Until now, the excellent performance of China’s economy has also benefited from the market-oriented reform started in 1978, including the legalization and normalization of government policy-making. Today, the opposite behavior is just under the halo of China’s miracle caused by the above reform, abusing the wealth flow created by Reform and Opening Up and damaging the institutional foundation of reform and opening up, which will eventually make China lose the institutional factors of economic development. The reason why this happens is that power is not constrained. The so-called “unconstrained” means that the administrative department of the government is not bound by China’s existing texts of Constitution and laws. In these texts, there are clearly defined constitutional principles and constitutional rights, and administrative procedures that require administrative departments to strictly follow. As Mr. Liang Zhiping said, the minimum requirement of reform is that the party and government departments follow and implement the Constitution and laws they participate in the formulation. This is to restrict power. Therefore, in order to avoid the collapse of China’s economic development momentum, it is necessary to have a government that abides by the Constitution and laws and whose power is constrained.


Mancur Olsen, “Dictatorship, democracy and development”, Modern Institutional Economics, China Development Press, 2009.

Fan Gang, “Soft landing for reducing risks, increasing supply and restraining house prices”, viewpoint real estate network, September 21, 2021.

Jingwei observation, “Ranking list of thunderstorms of real estate companies in September 2021”, Baidu Real Estate Shantou Station, September 17, 2021.

Commons, Institutional Economics, Commercial Press, 1983.

Knight, Risk, Uncertainty and Profit, People’s University of China Press, 2005.

Sheng Hong, “How to reverse the economic downturn?”, FT Chinese, January 22, 2019.

Sheng Hong, “The judicial process should follow the basic rules of communication”, Professor Sheng Hong, WordPress, August 26, 2021.

Sheng Hong, “The road to evil is illegal”, Professor Sheng Hong, WordPress, September 5, 2020.

Si Qipu, “The first case of voluntary confiscation of private enterprises: where does Xiangda group come from?” Baidu, June 4, 2021.

M. Fujita, Paul Krugman, etc., Spatial Economics, China Renmin University Press, 2005.

Wu Lei, “Briefing on the second day of court trial of Dawu case”, Wechat circle of friends, July 16, 2021.

Xiaoshui, “It has become a trend to ban out of school counseling institutions. Where are the 10 million unemployed?” Tax Saving Network, August 4, 2021.

Erasmus, On the Education of Christian Monarchs, Shanghai People’s publishing house, 2003.

Yin Zhongli, “Turning point signal in the real estate market”, Tencent, September 20, 2021.

Yu Jingwen, Wang Min and Guo Kaiming, “Land finance or land finance?”, economic science, 2019, issue 1.

October 21, 2021 in Fivewoods Study

Author: flourishflood

Economist, Confucianist

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