Following the targeted reduction of commercial banks' reserve requirement ratios on April 25, 2014, the central bank once again deployed the policy lever of “targeted RRR cuts” on June 9, injecting substantial funds into the market. According to the central bank's document, only “commercial banks that meet prudent operating requirements and whose loans to ‘agriculture, rural areas and farmers’ and small and micro enterprises reach a certain proportion may have their RMB reserve requirement ratios lowered by 0.5 percentage points”—that is, the government is encouraging financial institutions to allocate funds to private enterprises and rural areas, channeling funds back to the real sector in a targeted manner. I believe that rescuing China's real economy is a necessary precondition for stable economic development. On social hot-button issues such as the decline of Chinese manufacturing, massive capital outflows, and the whole nation speculating in real estate, I offered an in-depth interpretation in my latest work, Can the “New Deal” Change China?, released in April 2014. Below is an excerpt from the book's main text, for readers' enjoyment.

Based on more in-depth research, I believe that housing prices themselves are a feverish phenomenon, but they are not composed of a few superficial factors alone. After observing China's property market over the past few years, I have summarized the “volcano theory”—it is inflation and the decline of manufacturing that have caused housing prices to soar.

First, inflation. In recent years our inflation has been severe, making the phrase “the renminbi has let the Chinese people down” from a CCTV interview in November 2013 an instant hit. And the facts bear this out: official data show that in 2007, 2008, 2010 and 2011, our full-year CPI all hovered around the warning line of 5%. Under such circumstances, currency depreciation and money losing its value occur.

The money in our ordinary people's hands is all hard-earned savings—how can we make it grow and preserve its purchasing power? First, in years when the inflation rate is too high, putting money in the bank results in “negative interest rates.” Let me give you a set of data: in 2011, in order to tighten monetary policy, our central bank raised the one-year fixed deposit interest rate four times, from 2.75% to 3.5%. However, in every month of 2011, the year-on-year growth rate of our national CPI was never below 4.1%, and at its highest it even reached 6.5%. From the chart below we can see that in every month of 2011, the year-on-year growth rate of national CPI was higher than that month's one-year fixed deposit interest rate. Under such circumstances, what can ordinary people do? Because investment channels are limited, they can only speculate in stocks, buy gold, or buy houses.

Let us look at the second reason, which is also very important: the manufacturing crisis. Let me give you a set of macro data: from May 2012 to May 2013, China's manufacturing PMI hovered around the boom-or-bust line of 50, climbing at most to 50.9 in March 2013. Why did I choose this period? Because starting in 2012, the United States—once mired in economic crisis—began with its manufacturing sector and achieved an overall economic recovery. Take March 2013, when our PMI looked best: that month the global manufacturing PMI was 51.2, while the US PMI reached 54.6 (Markit survey results). This shows that in March 2013, when global manufacturing was thriving, we—as a “manufacturing powerhouse”—were growing more slowly than the United States, and even more slowly than the global average.

Observing from the perspective of the manufacturing PMI, I can tell you with certainty that our manufacturing industry is undergoing a process of decline. What caused this result? First, heavy taxes; second, excessively high capital costs; third, continuously rising labor costs; fourth, continuously rising exchange rates; fifth, international trade wars, and so on. In summary, the overall investment and business environment of our manufacturing industry is deteriorating rapidly, and profits are falling sharply. For manufacturing entrepreneurs, running a business means losing money. To keep their assets from shrinking, they withdraw money from manufacturing and buy houses.

Thus, money from ordinary people and money from manufacturing entrepreneurs all converge into a hot current, forming fiery magma. As the magma grows, the volcano finally erupts, and our housing prices rise uncontrollably. This is why China's housing prices are different from those anywhere else in the world, and why high taxes do not suppress high housing prices. The 32 rounds of property market regulation merely took a big rock and pressed it on the crater, doing nothing to cool the magma—a case of burying one's head in the sand. To address China's high housing prices, only by curbing inflation and improving the business environment can we truly remove the firewood from under the cauldron.