Systemic Risk (II): Property-Market Bubble

Abstract

Compared with its shadow-banking and local government debt, China’s property market correction (which started in 2013 and is ongoing at the time of writing) is potentially a much bigger risk to both the domestic and global economies. Arguably, it is also China’s biggest policy challenge during its financial transformation as macro policy cannot tackle the micro problems in the sector, where there is no property bubble on a national scale but only bubble pockets in large cities. Aggravating this challenge is structural reforms, which are increasing financial stress in the property sector. If Beijing mishandles the property market risk, its correction could easily crush the economy, thus derailing structural reforms that are needed to transit towards a market-orientated system as the Impossible Trinity unfolds.