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Working papersClàudia Canals, Mercè Carreras-Solanas
  • The possible existence of a bubble in the Chinese property market is a major and global concern. Specially so when considering the relevance of the real estate sector in the Chinese economy, making up 12 percent of GDP, and China's weight in the global economy.

  • According to data released by National Bureau of Statistics, aggregate Chinese housing prices have risen around 9% annually in real terms, closely tracking its economic growth, and showing no signs of a bubble.

  • However, there are large cross-city differences in housing dynamics as well as geographical differences that are not well captured by the aggregate price index. Our study suggests that housing bubbles are concentrated in a few big south east coastal cities like Shanghai, Shenzhen and Hangzhou, as well as in Beijing.

  • Moreover, the study explains the main factors behind housing price movements: per capita income growth; strong urbanization and migration towards big coastal cities; large fiscal stimulus and credit loosening in response to the global crisis; local government's finance dependence on land sales and state owned enterprises effects as a significant land bidder; and limited investment and saving options, low interest rates and high price expectations.

  • Finally, the paper estimates that a large slowdown in real estate activity would reduce Chinese growth by 1.75 percentage points. Hence, considering China's potential growth being close to 8.5%, such a slowdown in the housing market would reduce the GDP growth to 6.75%, a relatively soft landing scenario. However, if other major downside risks materialized, a harder landing would be difficult to avoid.