Professor Sheng Songcheng, Counselor of the People’s Bank of China, pointed out when attending the “The First World Block Chain Conference & Internet + Manufacturing Innovation Development Summit Forum 2016” that, the key factor of real estate price rise lies in the “supply side”, but our current polices are mostly concentrated in the “demand side”, so curbing real estate prices should “start from both sides of supply and demand”, while now more efforts shall be made to reinforce supply-side policies. Sheng Songcheng stated, according to the latest calculation, in the structure of housing prices, government revenue accounts for about 60%. Research has shown that, as an important part of government revenue, land-transferring fees take up nearly 50% in fiscal revenue of many local governments, and even more than 60% in some cities.

Sheng Songcheng commented, the land capitalization model represented by land finance, at the same time of driving economic development, also to a certain extent provides incentives for short-term behaviors of local governments. As high land prices can increase the revenue obtained by local governments through land auction, local governments are motivated to obtain more land finance revenue by maintaining the scarcity of land supply. On that premise, it would be difficult to increase the supply of land. He pointed out that, high land prices will raise the cost of urban development, and local governments are also likely to have further increased reliance upon real estate, which goes against attracting talents or cultivating new economic growth points, and thus might weaken urban competitiveness.

I think, this is a more important issue, as high land prices have formed a vicious cycle of local economy. In a city, excessive land prices would bring difficulty for industrial development, and decrease in tax revenue, forcing local governments to rely more upon land revenue. Besides, land price rise would lead to labor price rise, and heavier burden on enterprise. This can explain why talents, and ordinary labor forces as well, could hardly enter.

Viewing the “labor shortage” of enterprises, experts would say the Chinese economy has reached the Lewis Turning Point; however, according to my observation, “Lewis Turning-Point” might be a false phenomenon. I believe, a key reason for “labor shortage” lies in that the cost of living in a city is too high, and entry of labor forces needs the enterprise to provide salary enough to cover such cost, but the enterprise is unable to provide the same. So, it’s the urban living cost that holds back the entry of labor forces into a city. The urban living cost is closely associated with urban land prices and housing prices.

Thus it can be seen that, without addressing the land finance issue, it’s impossible to realize the desire for reduced housing prices, and meanwhile, China’s economy would become more deformed. So, Sheng Songcheng stated, in the short run, a relationship of “rental-tax substitution” exists in fiscal revenue of governments, i.e. the higher rental income governments obtain from real estate, the lower tax revenue there would be from other industries, and the one-sided development of real estate has an adverse impact on real economy.

To put it more bluntly, land finance would, from the direction of land prices, cause severe damage to the survival environment of real economy, while the relationship of “rental-tax substitution” would also be completely unsustainable. In other words, if urban land prices wipe out real economy, then China would be the real breaking point of “economic bubble”, because the real economy has collapsed, land demand falls sharply, land prices would never go up, while virtual market prices could not get any support from real economy at all. Isn’t it an “economic bubble"?

Therefore, the key of housing price issues lies in land finance, rather than currency issues, and it is not a problem that can be resolved through monetary policy. Housing price issues are a consequence of reliance upon land finance, rather than currency issues. If we tighten the monetary policy due to housing prices rising too fast, it would result in causing damage to real economy but not housing prices.