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.