Incomplete Financial Markets and the Booming Housing Sector in China

IMF Working Paper 20/265

31 Pages Posted: 14 Oct 2020 Last revised: 17 Aug 2021

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Yunhui Zhao

International Monetary Fund (IMF)

Date Written: August 16, 2021

Abstract

Housing is by far the most important asset in households’ balance sheets across many countries including China, and the policy relevance of the housing sector has been increasingly recognized (as evident by the inclusion of the housing cost into ECB’s inflation measure proposed in its new monetary policy strategy published in July 2021). However, despite forceful and frequent government interventions, the rise in Chinese housing prices has not been contained as much as intended, a trend that has not been reversed by the COVID-19 shock. In this paper, we first provide some stylized facts and then a DSGE model (encompassing both demand and supply channels) to highlight the impact of financial market incompleteness (e.g., inadequate investment channels) on China’s housing prices. The model implies that to eradicate the root causes of the rising housing price, policymakers need to go beyond the housing market itself; instead, it would be desirable to deepen financial markets because these markets would help channel financial resources to productive sectors rather than to housing speculation. This is particularly important in the COVID era because without addressing this structural vulnerability, the higher household savings and the government stimulus may fuel the housing bubble and sow seeds for a future crisis. The paper can also shed light on the housing markets in other economies that face similar vulnerabilities.

Keywords: Chinese housing, COVID-19, Financial market incompleteness, DSGE

JEL Classification: E00, G18, G28, R30

Suggested Citation

Bayoumi, Tamim and Zhao, Yunhui, Incomplete Financial Markets and the Booming Housing Sector in China (August 16, 2021). IMF Working Paper 20/265, Available at SSRN: https://ssrn.com/abstract=3710338 or http://dx.doi.org/10.2139/ssrn.3710338

Tamim Bayoumi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yunhui Zhao (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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