- There are signs of disagreement among policymakers about how much to tighten monetary policy, with an influential voice warning that excessive tightening could trigger a sharp drop in housing prices.
- The proper role of monetary policy in restraining housing speculation has been the most vexed question facing the People’s Bank of China over the last decade.
- Beijing wants to avoid the fate of Japan, where growth stagnated following a sharp run-up in debt and the bursting of a housing bubble.
Chinese economic policymakers have signaled their intention to tighten monetary policy this year, amid the economy’s strong recovery from the pandemic, but some voices are warning that excessive tightening risks sparking a destabilizing drop in housing prices.
The clash between monetary stimulus and a bubbly housing market has been perhaps the most vexed question facing the People’s Bank of China (PBoC) over the last decade. At various points over recent business cycles, indicators of economic activity and goods inflation have implied the need for looser policy, while trends in housing prices arguably call for tightening. The stakes in this conflict are high, as property is the most important pillar of China’s economy and financial system. Loans directly related to property – including mortgages and developer loans – accounted for 28% of total bank loans outstanding at the end of 2020. Many other loans use land or buildings as collateral. Housing is also a key source of demand for the output of Chinese mines and factories, including steel, cement, appliances, and furniture, while land sales comprised 44% of local governments’ fiscal revenue last year.
A monetary policy debate
In late January, Ma Jun, former chief economist at the PBoC, warned that loose monetary policy was contributing to bubbles in the housing and stock markets. Ma, who until this month also served on the PBoC’s monetary policy committee, sparked a drop in the mainland and Hong Kong stock markets with comments calling for monetary policy changes to address the problem. Markets also waivered in early March when Guo Shuqing, head of the banking regulator and Communist Party secretary at the PBoC, said he was “very worried” about a bubble in the property market.
But Guo and Ma’s comments contrast with remarks by Sheng Songcheng, former head of the PBoC’s statistics and research department, who warned against using monetary tightening to address a housing bubble. Sheng told media this month that “tightening monetary policy cannot effectively prevent asset bubbles but will puncture the bubbles and bring huge economic losses.” PBoC Governor Yi Gang – who is ostensibly subordinate to Guo in the PBoC hierarchy but is understood to control day-to-day operations – appeared to seek a middle ground in this debate on 20 March, saying March that authorities would maintain “continuity, stability, and sustainability” in monetary policy.
Policymakers have sought to address the conflict between the housing market and the broader economy by relying on administrative and macro-prudential regulation to address the housing bubble. These include limits on the number of homes an individual may purchase and increases to the minimum down payment ratio. Sheng called for further use of these tools as an alternative to large rate increases. But these measures largely serve to suppress speculative demand without addressing the structural causes.
As previously discussed, Chinese policymakers want to avoid the fate of Japan, where growth stagnated due in part to the aftermath of a huge run-up in debt and the bursting of a housing bubble. Even as policymakers launched various economic stimulus measures in response to the pandemic last eyar, they promised to avoid stimulating the housing market. In late 2020, the banking regulator imposed new limits on bank lending to developers, while several city governments tightened qualifications for new home buyers.
Hostage to housing
But as Sheng’s comments suggest, fears of a sharp housing correction are an important constraint on more aggressive action to contain housing prices. Most economists agree that a property holding tax would help discourage speculation, but despite years of high-level discussion and pilot projects in a few cities, the proposal has proven too controversial to enact. Fiscal reforms to reduce local governments’ reliance on revenue from land sales have also failed to make significant progress. Meanwhile, tight controls on capital outflows effectively trap most Chinese savings inside the country, where continuous monetary expansion has pushed asset prices ever higher. There are signs that regulators may loosen controls on capital outflows this year, but these incremental changes will be too modest to relieve substnatial pressure on housing prices.
The current debate over monetary tightening is also a manifestation of a broader argument over how much to prioritize GDP growth relative to competing priorities like controlling financial risk and raising the quality of growth. The lack of a long-term GDP target in the 14th Five-Year Plan approved this month signals that the pendulum is swinging towards non-GDP priorities, but the commitment to continue setting GDP targets year by year shows that the pro-growth faction maintains significant influence. Economic growth in 2021 is not a concern, but when the business cycle turns, policymakers will again face difficult choices about whether to stimulate the housing market, even at the cost of inflating the bubble further.