WASHINGTON, July 8—With an overheating economy and an expanding bubble in residential property, China began tightening its monetary policy in early 2010. Pieter Bottelier writes that an uncontrolled collapse of the housing market is unlikely if Beijing can effectively cool speculative demand for housing. Still, China should remain wary of the potentially destabilizing social consequences associated with unaffordable housing.

Key Conclusions

• Bubble largely due to loose monetary policy. Concentrated in eastern cities, China’s residential property bubble is mainly the result of excessive credit expansion in 2009. Other factors include significant inflows from abroad, low bank deposit rates, widespread property speculation, corruption, and incentives for local governments to drive up land prices to augment local fiscal revenues.

• Beijing recognizes the risks and appears determined to control the property bubble. The central bank has carefully begun tightening monetary policy, but greater reliance is placed on administrative measures to reduce property speculation.

• Bubble unlikely to burst. If Beijing effectively uses the policy tools at its disposal, an uncontrolled meltdown will likely be avoided. But a market correction of 20–30 percent over the next 6–12 months is likely.

• Housing prices are key social and political issue. Housing affordability for first-time home buyers has become a major social and political issue and could trigger potentially destabilizing public discontent—even if the property bubble can be controlled. Accordingly, the government has started ambitious national “affordable housing” programs.

“Given the scarcity of land and high population density in eastern China, residential property prices will tend to be high relative to incomes, even if there is a market correction in the near-term,” writes Bottelier. “Widespread discontent over housing affordability could become a source of social instability and is for that reason very much on the government’s radar screen.”

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NOTES

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• Pieter Bottelier is a nonresident scholar in Carnegie’s International Economics Program and senior adjunct professor of China studies at the School of Advanced International Studies (SAIS), the Johns Hopkins University. His work currently focuses on China’s economic reform and development.

• The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, and draws out policy implications. The current focus of the Program is the global financial crisis and the policy issues raised. Among other research, the Program examines the ramifications of the rising weight of developing countries in the global economy.

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