Incomplete Financial Markets and the Booming Housing Sector in China

33 Pages Posted: 26 Jan 2021

See all articles by Tamim Bayoumi

Tamim Bayoumi


Yunhui Zhao

International Monetary Fund (IMF)

Date Written: December 1, 2020


Housing is by far the most important asset in Chinese households' balance sheets. 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 a 'slow-moving' structural vulnerability-financial market incompleteness-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.

JEL Classification: E00, G18, G28, R30, R31, O18, E21, G10

Suggested Citation

Bayoumi, Tamim and Zhao, Yunhui, Incomplete Financial Markets and the Booming Housing Sector in China (December 1, 2020). IMF Working Paper No. 2020/265, Available at SSRN:

Tamim Bayoumi

Independent ( email )

Yunhui Zhao (Contact Author)

International Monetary Fund (IMF) ( email )

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

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