In Market We Trust – Part II

xge made a very good point under my entry In Market We Trust. That is exactly what I am trying to say about the market – the difference is, xge just gave better examples. Let me continue the argument here.

Intuition

The government decision makers are very likely to make decisions based on intuition, and the planned economy mindset. I, myself, made even more frequent mistakes when I make decisions about the market. I admit that I did several things wrong in my business without respecting the market laws. Here are some examples about the actions people take (basically using xge’s examples).

Hainan’s Land

The recent sharp increase in the real estate price in Hainan was a typical example. When the Hainan announced the “International Tourism Island” strategy, the house price almost doubled over night by the stimulate.

The Hainan government was scared because of the jump in price. Then, in order to control the price, they immediately announced to pause supply of all commercial residential lands. Not surprisingly, the price doubled over night again.

Train Tickets and Taxi

Train tickets in Spring Festival times are extremely hard to get because of the huge demand (2.5 billion people/time needs to travel in the 40 days), and limited supply (not enough trains). The price for the train tickets went as high as 4x of the original price in the escort market.

In order to keep the price low, the government requires all train tickets keep the cheap price, and crack down all the escort market, and implement Real Name system for train tickets – none of them touch the supply and demand. Not surprisingly, it is still hard to find a ticket.

For taxi, people complain that the taxi is expensive, and hard to hire in rush hours, so “illegal taxi” started to emerge to help them out. In order to keep the price of taxi low, the government tried everything they can to crackdown the illegal taxis, greatly reduced the supply. Not surprisingly, taxi is harder to get, and the government enforced low price (lower than fair market value) keeps taxi drivers out of the market. (Well. for the taxi business, the real problem is, the monopoly of government owned taxi companies get too high fee out of the pocket of taxi drivers, and use the power to keep private sector entering this market).

Supply and Demand

Finally, we started to understand the simple market rule: price is determined by the supply and demand. The only way to drive price down is to increase supply, and the only way to drive price up is either to decrease supply or increase demand.

5 thoughts on “In Market We Trust – Part II

  1. one

    It happens all the time. The government doesn’t believe in the market and they always think they can win over market forces. But the rules of markets are just like rules of physics, you can only follow them. Hoping to win over market forces is like hoping to change human instincts but the government doesn’t seem to understand this.

  2. Jian Shuo Wang

    Not only the government – most of people in real life may not understand it, because it is anti-intuitive – people tend to control things, instead of leave the natural laws control. Anyone wants to make a better life, but most of the willingness turned to terrible actions.

  3. jqian

    “The Hainan government was scared because of the jump in price. Then, in order to control the price, they immediately announced to pause supply of all commercial residential lands. Not surprisingly, the price doubled over night again.”

    This is a laughable approach to control the price of housing market. When you limit the supply at the time the demand is rising, of course, the price will shoot up. That’s a typical example of how a policy driven economy wouldn’t work for the goods of the society. When they try to control the price, the price goes higher. You will see soon that when the price shot up to an unsustainable level, the ensuing crash would be very painful to the buyers, the agents and the governments. Everybody will suffer in the end.

    Rather, they should satisfy the demands, approve more lands to build affordable housing and at the same time limit speculators from buying more than 1 unit. The bubble can be contained with right policies. But Chinese government has kept using the wrong policy, that explained why price everywhere, not just Hainan, simply kept rising despite the so called “cooling down” efforts. The Japanese have suffered nearly 20 years due to bad policies in the late 80s. Will Chinese escape the fate of Japanese, from the current stupid policies, the chance is slim.

    See how the Wall Street is labeling Hainan in a recent BusinessInsider article: “The Mindblowing Bubble In The “Miami Of China”

    http://www.businessinsider.com/the-mindblowing-bubble-in-the-miami-of-china-2010-3

  4. jqian

    If you read Chinese, here is a good perspective why China’s housing price is sky high:

    http://lianli1208.blog.sohu.com/145790649.html

    It may be true like the author said that China’s housing price can be ultimately attributed to an incorrect law that allows the government to legally participate in the game of wealth grabbing from society at large. In western nations, 90% of lands are not owned by the governments. Government has no right to control the land price or issue the land usage rights. Government only enjoys the property tax revenues from the land or house owners. In China, it’s quite opposite, the government controls 100% ownership right for land and housing. They only issue usage rights to developers and end buyers. With such law, there is no wonder why the housing price is so high.

Leave a Reply

Your email address will not be published. Required fields are marked *