How understanding the roots of China’s property bubble can prevent a repeat of past mistakes
- Beijing must ensure it avoids repeating past missteps as it advances new monetary and fiscal policies to stimulate growth and recovery
- Otherwise, it risks creating a tech bubble that could hamstring its long-term ability to compete globally
First, the various property market reforms that were brought in rather quickly, starting in the 1980s and early 1990s, introduced a massive new sector to China’s economic landscape. The growth of this market was desired and perhaps unavoidable.
In fact, while rising values were associated with high economic growth, they were also supported by restrictive policies that left few good investment alternatives for those seeking comparably high returns and growth potential but relatively low risks.
Second, by some estimates, those associated with the third generation of China’s leadership benefited disproportionately from the new property market and entrenched their financial and political interests there.
Third, when the global financial crisis hit in 2008, many national governments looked for ways to pump money into their economies to promote liquidity. In China, this was accomplished by pumping money into the property sector and SOEs because these were the vehicles available for massive cash infusions.
Zoning laws were strictly enforced, pushing back against businesses renting residential units to exploit low utility rates, and residential renters were restricted from living in commercial properties to exploit comparably low property prices. Leaders also legalised new investment alternatives to attract capital away from real estate and into other parts of the economy needing money for growth.
Fifth, however, China has reached a junction with three intersections. There is the economic necessity of dealing with the crisis, the political opportunity of “letting” the crisis happen, and an institutional capacity to manage it.
The second is to do so in ways that benefit some regions, such as the Greater Bay Area, at the expense of others, such as Shanghai – arguably with the aim of creating more equity between key economic regions.
Given the historical causes of the property bubble, it is vital that the Chinese government avoids repeating mistakes as it advances new monetary and fiscal policies to stimulate growth and recovery.
Massive budgets are planned to achieve these goals and others like them, and they are likely to boost local GDP growth in the short term.
Josef Gregory Mahoney is professor of politics and international relations at East China Normal University in Shanghai and senior research fellow with the Institute for the Development of Socialism with Chinese Characteristics at Southeast University in Nanjing