Alicia Garcia-Herrero, chief economist for Asia-Pacific at the investment bank Natixis, has recently said in her article that China’s current property crisis is similar to Japan’s equity and real estate bubble burst that started between 1986 and 1991. 

Despite differences, Herrero still believes that Japan’s case is the best example for the communist regime to study policy options for handling its real estate troubles. 

The report noted that many analysts have already compared China’s property dilemma to the U.S. subprime mortgage crisis in 2007. 

But they are entirely different. The U.S. crisis emerged due to a lack of domestic savings, and American households utilized banks’ easy mortgage policy to keep borrowing money to buy housing properties. This resulted in a rapid increase in home prices and a follow-up market bubble.

The opposite holds for China’s case. Due to the country’s capital control measures, Chinese families tend to save more instead of spending. This, coupled with poor investment options, has dramatically lowered demands for real estate amid excess housing production in all but the nation’s largest cities.

As macroeconomic imbalances in Japan’s property bubble burst resemble China’s today, the author thinks it is more reasonable to compare the two countries.

In those years, due to solid financial deregulation, and easy monetary policy, the Japanese population had excessive savings and kept purchasing property. This led to a vast property bubble as investors speculated that home prices would keep surging. 

On top of that, the country also witnessed a rapid yen appreciation after the 1985 Plaza Accord to solve currency imbalances with the U.S. and major European economies.

Herrero pointed out that when the property bubble popped, the Japanese government did not intervene quickly but kept waiting for banks to solve the problems on their own.

This further led to rising inevitable costs of the crisis as the banks were unwilling to tackle new risks and caused stagnation in credit growth.

On the other hand, China’s case was partly because of financial liberalization. Real estate firms obtain their funds from shadow banks which require less scrutiny than regulated banks and other lenders. 

The chief economist noted that the main difference between the two cases is that China kept its economic growth rate higher than Japan’s at that time. This advantage gave the communist regime a more considerable margin for error.

However, a draconian “zero-COVID” policy, along with an aging community and shrinking returns on assets, would likely drag on Beijing’s growth rate in the coming years.

The country’s reaction to the property crisis will rely on its economic growth deceleration rate and remaining fiscal space.

Another noteworthy point in both cases is that government revenues come mainly from land sales, especially at the local level. Therefore, the bubble burst will lead to a worsened fiscal position.

Lastly, Herrero wants world policymakers to take the two most essential lessons from Japan’s case. 

First, a timely and quick intervention will help reduce the economic costs of the crisis. Second, regulators should never depend mainly on economic growth or fiscal room to shore up the property market, as both will suffer when land and home prices fall.

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