China’s Controlled Potential Property Bubble and Its Economic Slowdown: Overview of Causes and Policy Options

Abstract

Although fears of a ‘hard landing’ for the Chinese economy gradually disappeared in 2012, the unprecedented Chinese GDP growth of the preceding decades still, at the time of writing in 2013, has a somewhat alarming undertone. A hangover from the stimulus package of 2008/09 pushed up growth rates but also contributed to a troubled housing market. China’s residential property prices continue to soar, with some stagnation between 2011 and 2012, and fears have arisen that a bursting bubble could put both the national and the global economy at risk of a new slowdown. However, it is debatable to what extent there does indeed exist a housing bubble and if so, when it is expected to burst. Against the backdrop of global economic woes, the Chinese economy is growing at a somewhat slower pace, not least because the People’s Bank of China (PBC) made it more difficult for companies to borrow in 2010/11. As a result, the property bubble started to deflate during the summer of 2011, when housing prices began to fall following policies responding to complaints that members of the middle classes were unable to afford homes in major first-tier cities like Beijing and Shanghai. Although from May 2012 house prices started to rise again for the first time in almost a year, the deflationary trend of the property bubble was seen as one of the primary causes for China’s declining economic growth in 2012.