Over the past several years, the pace of the changes in China’s volatile housing market could give anyone whiplash. The Chinese government, worried that property prices were climbing too high, first started taking steps to hold down prices. In some places, they fell by as much as ten percent. Then, fearful of the disastrous economic effects of a bursting housing bubble, authorities relaxed these policies. Now they’ve started to artificially create land scarcity to drive prices up again by reducing the number of competitive auctions. Critics worry that the skyrocketing land prices will once again increase the chances that the housing bubble will burst.
Our reaction at Via Meadia to this news is mixed. On the one hand, we are glad that the bubble isn’t about to pop at a bad time for the world economy. China’s housing market has been a large part of the country’s relatively strong performance during the global recession. On the other hand, the means the Chinese government is using to keep prices high are suspect and could lead to a worse collapse sometime in the future. More importantly, the market’s intense price fluctuations and the somewhat extreme and contradictory official responses suggest that managing an economy as large and changing as China’s is very difficult even for a competent government. In reality, it is impossible even for a technocratic government independent of electoral constraints to serve for long as a disinterested philosopher king. The financial interests of the powerful warp the decision making processes of the state, and policy warps in ways that ultimately undermine both solvency and stability. China is clearly moving in this direction, but nobody in China or outside it knows when or if this process will lead to such dysfunctional policy that crisis becomes inevitable.
The rise in prices, then, is good news in the short term, but it points to weakness in the Chinese economy that could have seriously damaging effects down the road. We wish the country’s government the best in trying to negotiate between the Scylla of market contraction and the Charybdis of unsustainable growth. Much will depend on its success.