A Study of the Property Market in China and its Relationship with the Macroeconomy

Abstract

We show the existence of a large property bubble in the Chinese economy beginning in the fourth quarter of 2001, which we prove marks the start of a new era in the Chinese monetary history. We explore the relationships between CPI and M2/GDP and between Property Prices and M2/GDP in 1998-Q3 2001 and Q4 2001-2010, and how they change in the two period, from “pre-bubble” to “post-bubble”. We show that excess growth of money relative to real GDP is able to explain CPI in 1998-Q3 2001 but not in Q4 2001-2010. We build VAR models and prove that long run neutrality of money does not hold in the period 1998-2010 but it holds when the property prices are used instead of CPI. Lastly, we show that the property price bubble has been fuelled by sharp money growth, and then offer some policy suggestions.