Simon Zhao | China's Housing Bubble vs. Protecting the RMB

Today on The Negotiation, we are taking aim at trying to understand the housing bubble in China, by speaking with Professor Simon Zhao, Former Director at the International Centre for China Development Studies, University of Hong Kong. Simon has recently published an article on the housing bubble in China, so we thought he would be an excellent place to start our conversation.

Simon tells us that it has only been in the last 40 years that its citizens could actually purchase property and homes; before then it belonged to the government, and the government provided housing to the people. Therefore, land and property had no value. However, China was quite interested in the Hong Kong model, and soon adopted the method of allowing private citizens to purchase and own land. Soon the government was pouring resources into land development in order to create a marketplace where it could tax purchases and development and grow its GDP. As Simon mentions, the government “did not allow the market price to go down”, which has contributed to the problem it has today.

We ask Simon about the famous ghost towns, rather ghost cities, the massive developments that could house tens of thousands of people, seemingly built with the knowledge it was purely a surplus where no one needed to live. Simon tells us that the government would enable the banks to lend with protection against defaults so that demand stayed high and development would continue, allowing the country to artificially inflate GDP and collect taxes on 30% to 50% of the development and sale costs.

When we asked Simon if China has a housing bubble, he said not in Tier 1 cities, there are so many people still moving to these cities the demand is still high and the value is true. Where the issue lies is where there is no liquidity in the market. In smaller cities to the North and to the West, there is shrinking demand, and those that own property is unable to get out from under their mortgages.

Simon points to some major milestones to recognize as important dates in history that impacted the housing sector greatly. The first was entering the WTO in 2001, and the other was the Olympics in 2008. They coincided with tremendous growth in the manufacturing sector and China’s economic growth spurt overall. However the “financial tsunami” of 2009 drew $4 Trillion in aid from the government that was largely injected into the housing sector as well, which overcooked the economy in general, but the housing sector felt it the most. From that point to now the government has been doing everything it can to try and cool the housing sector without causing a drastic deflation in the RMB.