Home> > The Real Estate Bubble and the Chinese Approach to Reform

Back to the previous page
News Release

The Real Estate Bubble and the Chinese Approach to Reform

July 21, 2005

Overview

Major changes are taking place in China's real estate market. Until very recently, real estate prices in Shanghai, Beijing and other major cities were recording 2-digit growth, but the average value of transactions and the number of contracts signed have both fallen sharply, and the market appears to be stagnating. Is China's real estate about to bubble burst? The chances that China's real estate bubble will collapse, triggering economic problems similar those experienced in Japan, are low. The real estate sector is a pillar of China's economic growth, and for this reason it is likely that central and local government bodies at every level will seek to manage policy in such a way as to ensure that the problem does not grow any worse rather than finding a fundamental solution to the problem.

Of greater importance are the limitations of the Chinese approach to reform that have become apparent in the course of the formation of the current real estate bubble. Real estate reflects political and social conditions in China more clearly than any other sector of industry, and no sector is of more useful as a reference for the analysis of those conditions. Close examination of the process by which the current real estate bubble was formed reveals that a major role was played by a number of factors that could be termed "uniquely Chinese". Interest groups such as speculative investors and real estate developers and agents and government, especially local government, effectively constitute a community of interest, which has exercised influence on the formation of the supply-demand relationship in real estate, the policy-making process and public opinion, to intentionally bring about a steep rise in real estate prices.

So why is it not possible to implement radical reforms that would ensure a soft landing for the real estate market? The most important reason is the limitations of the "separation of politics and economics" approach to reform, whereby China has hesitated to reform its political system while pressing ahead with conversion to a market economy. First, the fact that this approach involves the "separation of politics and economics" prevents the Communist Party and the government from ever relinquishing their role as leaders of economic activity. Second, although efforts have been made to diversify society in conjunction with the conversion to a market economy, delay in reforming the political system to cope with this diversification has led to the development of a society polarized between "winners", who have access to capital and authority, and "losers", who do not.

Innovative reforms based on the "separation of politics and economics" have so far borne fruit in the form of rapid economic growth, but now present a major obstacle to the creation of a base for sustained growth. China is coming to the stage at which radical reforms will be essential if it is to resolve the problems of the real estate market, among other issues, and achieve a smooth transition to a new phase of economic development.

For more information on the content of this report, please contact: Wu Junhua, Yoshihito Sato the Japan Research Institute, Limited.

Tel: 86-21-6841-3368(Hong Kong), 03-3288-5360
E-mail:wo.junhua@jri.co.jp, sato.yoshihito@jri.co.jp

News Release
Get ADOBE READER

To view the PDF files,
you need Adobe Reader installed.
Adobe Reader downloadExternal link