China’s property bubble!!

Original source: SimoleonSense.com .

Summary (via Takatoshi Ito Voxeu)

One objection to the calls for China to let its currency appreciate argues that the yen’s appreciation during the 1980s was a cause of Japan’s “lost decade”. This column instead blames policymakers for not dealing with Japan’s property bubble early enough. China should learn from these mistakes with its own property bubble and let the renminbi appreciate.

Quick Excerpted Conclusion (via Takatoshi Ito @ Voxeu)

In failing to prevent a bubble from getting bigger and bigger, the Chinese authorities are making a mistake – low interest rate policy and resisting currency appreciation – similar to Japan’s in the 1980s. China’s reported inflation rate does not show rampant CPI inflation, but there was no CPI inflation in Japan in the 1980s. The property bubble is a clear sign of overheating. Trade surpluses were large both in Japan in the 1980s and in China now. The first best policy is interest rate hikes to restrain the property boom, resulting as well in an appreciation of the Chinese renminbi that prevents hot money inflows. The Chinese authorities are already taking some measures to restrain banks from increasing credits to the property sector – tightening regulations of loan-to-value ratios and increasing the reserve requirement and this should continue. If the renminbi does appreciate, overheating of China’s export sectors will be slowed, while standards of living will improve with higher purchasing power.

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