Saturday, June 03, 2006

Cooling China's Property Market, More Difficult than You Think

Over the last few months, Chinese government is increasingly concerned about its red-hot property market, and has launched a series of measures (read more here and here) in order to orchestrate a soft-landing.

Now of course a red hot property market is an outcome, a result of the interactions between and among different individuals and groups participating in an economy.

They are played by a set of rules governing their behaviour. So, before we can evaluate whether the problem in the property market can be properly addressed by the latest government policies, we have to figure out what those rules are.

China has a de facto federal system with substantial power, mostly economic, vested at the local level. Under the current fiscal system, land is the major source of revenue for local governments. Economic perfomance of the areas under their rein is one of the most important criteria for evaluating local officials' performance. Combining the two, then it should not be too difficult to understand why it is the interest of the local officials to see a boom in their local property markets.

The central government thinks differently, of course. For it's concern is mainly the stability of the overall economy. In other words, the rules that are now in place (fiscal rules, and those governing how local officials are evaluated) generate conflicting objectives between the local and the central governments.

Unless those rules are altered, it is hard to see how policies annouced by the central government can effectively deal with the red-hot property market.

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