Government Actions

Whether or not the Chinese property bubble will burst in the near future has triggered controversial arguments. In my point of view, this technically relies on the effect of government actions, as the case in China is somehow uniquely characterized. Before presenting the government actions required for bubble deflation in China, let us have a look at the historical ones in Japan and the United States.

In Japan, the property bubble burst in 1992 caused immeasurable consequences, which were mostly due to the passive tight-money policy adopted by the Japanese government. Allen and Gale (2000) demonstrated that Bank of Japan paid too much attention on fighting with inflation along with the tightened monetary policy, which then resulted in the sharp escalation in interest rates in early 1990, accelerating the burst of property bubble. Accordingly, the research and development (R&D) expense in the manufacturing industry decreased 3.5%, which made Japan out of their superiority in the branch of motor vehicle and semiconductor. This production recession led the country to the deterioration of the overall employment setting and the drop in the resident real income.

Unlike Japan, the U.S. government actions to the property bubble were flexible and had fundamentally avoided the huge fluctuations in property prices as happened in the stock markets. The government adopted the monetary policy of adjusting the interest rates of housing loans accordingly to the central bank interest rate on a daily basis, in order to regulate the overall property price tendency by providing central bank an advantageous and sensitive leverage effect.

Back to China, what the government has done so far is to increase the interest rates, leading to a costly endeavor to borrow for housing as well as investment speculations. Moreover, the government has carried out the property tax policy to restrict home purchase so as to restrain the booming property bubble. However, the government actions for China should be reinforced further with respect to the lessons learned from historical bubbles in other countries, so as to induce positive effects on the overall economy. To start with, based on the considerations of investors, the Chinese government should prohibit excessive speculations in short-term buying and selling houses by increasing the minimum down payment and imposing higher property tax in eastern major cities. To go deeper, in the position of property developers, the Chinese government should improve regulation on the development scale of the property market, or strengthen the construction of economically affordable housing. Finally for the central authority itself, the relationship between the banks and the property industry should be well balanced and regulated while the land resources management is ought to be consolidated. Taking all these considerations into account, the Chinese property bubble would not follow the step of that in Japan and instead it could be slowly deflated in the near future.

Potential Consequences

Over the past two decades, China is exceedingly dependent on the property construction for its economic growth. For Chinese citizens, property market is instead a favorable investment field to obtain greater returns than that from the bank deposit payment. Nowadays residential prices are declining and the property bubbles in China are deflating gently, however, the potential immense consequences cannot be underemphasized, as it could cause negative spillovers to other countries worldwide.

Initially, it is obvious that the bursting property bubble in China would cause strong negative impact on banking sectors, as the leading industry in banks is to provide loans for people who purchase houses. However, this is not the worst.

On the economic side, the property demand would probably shrinkage throughout the continuous increase of supply over the past few years. At this point, the property price would probably decline substantially, resulting in the deterioration of other related industries. From then onwards, there would be a crash in the global demand for construction equipment sectors, such as iron, copper, lumber, steel, and cement. Furthermore, stock prices decay and firms would experience heavy losses and be forced to sell properties or stock equities. This would not only reduce the incoming investments, but also cut down the capital for research and development (R&D) within the firm.

On the other side, it would lead to social instability. It cannot be ignored that the burst of Chinese property bubble would give rise to a significant increase in the unemployment rate, as well as the public discontent in the community, resulting in an unexpected increase in criminal activities. Frankly speaking, the consequences are unthinkable, but how could Chinese government handle these social unrest resulted from individual frustrations?

In conclusion, the potential consequences of the Chinese property bubble are extremely worrying. It is not only about the losses to property developers or investors, but also about the overall construction sector supported by numerous industries on building components, along with those local governments which largely depend on the income from property markets to secure their operation funding. Therefore, government actions are rather significant at this stage.

Possible Contributing Factors

Problems raised in the property sector are significant for a country’s sustainable development. Therefore, several categorized contributing factors causing the property bubble in China cannot be underemphasized.

(a) Catalytic factors

Frankly speaking, the increasing tendency of urbanization is the beginning of the overall issue amongst the property market. The accumulative number of people who come to stay in the cities leads to the booming economy in China, as well as the heating real estate market. Moreover, personal income has grown dramatically since the urbanization, and people become more elastic on money expenditure. Not only can people buy dairy commodities, but also invest in stock and property markets to obtain returns.

However, things could go wrong if the markets are not well balanced. Excessive investments have led to the credit crunch amongst the property developers themselves in the recent decade. By observing market profitability, a number of speculators enter the real estate market and make sizable returns by short-term buying and selling, resulting in investment demand driven. Unfortunately, people are usually too hubris about their own abilities and extrapolate past trends into forecasting, resulting in massive property bubbles in the end. Even worse, losses could also drive investors irrationally risk-averse, which may cause dramatic price drop when the bubbles burst. 

(b) Governmental factors

After the global financial crises triggered in 2008 particularly, the Chinese government mandated to lower the interest rate and increase the bank lending. Furthermore, there are huge incentives for local governments to escalate land prices and sell them to enlarge their fiscal revenue, as land sales account for up to 50% of the revenue. Unpredictably, this may lead to a continuous excavating of land, and deteriorating our natural environment in the meantime.

(c) Cultural factors

In my point of view, cultural pressure on the new marriage generation cannot be underemphasized in booming the property bubble in China. Owning a property is one’s asset and it gives us people a sense of safeness and belonging. Men work hard in order to secure their property assets whilst approximately 70% of women consider owning at least one property as a prerequisite before men ask for their marriage. This realistic consideration for both men and women then lead to the deterioration of the property bubble, particularly in major eastern cities in China.

The Present Chinese Property Bubble

My motivation for this research topic is raised from the economic anomalies in the Chinese market today due to the hidden booming property bubble that might burst in the near future.

A property bubble, also referred to as housing bubble for residential market, stands one of the most substantial economic concern that occurs periodically in the global property markets. It is characterized by prompt rises in the valuation of real property until it reaches an unsustainable level resulting in a dramatic decline in housing prices.

Generally speaking, the property sector in China is now cooling down after the housing mania has been faded. Bottelier (2010) demonstrated that urban house prices experienced a substantial increase of approximately 30% per year in major cities in China from 2002-2006 averagely, although there occurred to be a high number of unoccupied residential or commercial units (housing vacancy rate). According to the National Bureau of Statistics of China (NBSC), for instance, the property prices in Shanghai increased by over 150% from 2003-2010 with a dramatic price drop at the end of 2010. Furthermore, with regard to the updated property price index for 2012, it is worth noting that the price-to-income ratios are 1/28.64, 1/30.36, 1/41.15 in Beijing, Shanghai and Shenzhen respectively; whilst the price-to-rent ratios are 1/27.07, 1/36.12, 1/28.15 in the centre of the three major cities above. These statistical figures do not seem to be optimistic or even reasonable for a country with high GDP growth in the recent decade.

My research questions are therefore raised as below. To start with, is there any possibility that the problematic property circumstance in China would follow the property bubble developed in Japan from 1982-1991? Secondly, will the property bubble in China burst or deflate in the near future? Finally, if the property bubble in China is to be deflated, then what will be the effective government actions compared with Japan and the United States?

Anomalies? Bubbles!

Nowadays, the economy anomalies in the People's Republic of China have triggered heated discussions in our daily lives. The Gross Domestic Product (GDP) of China has had a dramatic growth in the recent decades, yet Chinese citizens do not seem to be pleased about this overheating economy at all. To go deeper, people outside China call on the increase in the valuation of RMB currency, yet it actually decreases in our people’s hands resulting from the high pricing of commodities, indicating that the money today does not worth as much as before. Moreover, even though the overall world market economy does not have an impact on a country’s GDP growth rate, yet why our assets have now inflated to bubbles as the world economy changes?

Taken all these considerations into account, the China economy bubble seems to be very worrying for the country’s sustainable development in the near future. Therefore, whether or not China could save the world economy, becomes one of the most important concerns in the world today. In the following blog posts, I am going to focus on the attention-grabbing issue of the real estate market, namely, the property bubble in the People’s Republic of China.