Krugman 2.0: Chinese Economist Calls for a Housing Bubble

Mises: Krugman's Call for a Housing Bubble

In 2009, Lew Rockwell posted this quote of Paul Krugman's from a 2002 New York Times editorial:

To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Krugman. 2002. Calling for a housing bubble.

China Can't Quit Housing

Facing an unprecedented situation caused by the SARS2 pandemic, China finds itself in the same situation as developed nations: blow another bubble in the key industry, devalue your currency (or have a debt jubilee) or let the market unleash the full power of deflation to cleanse balance sheets. All have chosen asset inflation. The Federal Reserve is propping up stocks and junk bonds. The BOJ will presumably own the entire Nikkei at some future date. Australia chose housing. AFR: New home buyers to get cash grants. The Chinese government has chosen a similar policy by default as its monetary easing flows into real estate. See: Here We Go Again: Chinese Land Sales Soaring But now a Chinese economist calls for an explicit policy of asset inflation.

iFeng: 只有房产才能救中国经济？官方回应

Recently, Dong Fan, a professor at Beijing Normal University, is again anxious. He recently published an article saying, "The three major impacts must be adjusted as soon as possible to save the market! The real estate industry is not only a dominant industry, it is also a pillar industry, and a leading industry in the national economy. At the same time, only the real estate industry has these three characteristics. In extraordinary circumstances, in the context of the lack of other measures to rescue the market, adjusting the real estate control policy as soon as possible to stimulate domestic demand has become necessary and will be the most effective countermeasure."

China's economy is highly dependent on real estate. All efforts to reform away from real estate over the past decade have failed. Credit does not grow fast enough for economic growth unless it is real estate related lending. Unless a painful structural reform path is chosen, credit is going to flow into real estate. As much as one may disagree with Dong Fan's advice, the only way China will grow in the immediate future is through a real estate bubble.

The reason is simple. Dong Fan believes that the contribution of real estate to economic growth is unparalleled. "The sale of final products in the real estate industry has only contributed to the realization of all or part of the added value of other industries. This is the contribution of the industry's own industrial integration capabilities to economic growth. The real estate industry's contribution to GDP can account for about 40%, Relaxing policies can reverse the dilemma."

It’s Dong Fan’s theory of real estate omnipotence. “The real estate industry directly promotes the development of dozens of related industries such as construction, building materials, planning and design, steel, textiles, home appliances, furniture, decoration, and greening.” Obviously, Dong Fan once again Take out the real estate omnipotence theory to tie up the economy and think that without my real estate, your economy cannot be recovered.

The author of the iFeng article does not agree:

What Dong Fan said most often is that without the real estate industry, the Chinese economy cannot be saved. Is this correct? I think it makes sense. Especially in the past so many years, real estate has been used to drive economic growth, and real estate has indeed made no small contribution. But we have made great achievements in gradually getting rid of over-reliance on real estate. Will we give up and give up our efforts?

Obviously, if you give up, the price will be huge, and the results of regulation will also suffer greatly. I really admire Dong Fan's feelings about real estate, which may be true love, or that he can't get rid of his dependence on real estate. But if a country goes on like this, it will definitely not work.

It can be seen from this that Dong Fan's "sorrow" is true and painful. Everyone knows. I really dare to let the country issue a document to declare the pillar status of real estate. I think that the pillar status of real estate in the past is undeniable, but as the side effects of real estate on economic growth become more and more obvious, the country is consciously getting rid of this excessive dependence, you now let Is it possible for the country to send the previous signal again?

After the state just announced that housing will not be speculated, the central bank once again stated that it insists on the positioning of housing for housing, not speculation, and the requirement of "not using real estate as a short-term stimulus to the economy" to maintain the continuity and consistency of real estate financial policies. For property and stability, adhere to the policy of adapting to the city, closely focus on the goals of stabilizing land prices, housing prices, and expectations, and improve the long-term management control mechanism to promote the stable and healthy development of the real estate market.

Very eloquently conveyed the direction of national policy, and also clarified the attitude towards real estate. It is not that real estate is not needed, but it is no longer overly dependent on real estate and no longer takes the old road of economic real estate. But Dong Fan repeatedly emphasized that there would be no economic growth without real estate, and trying to use this seemed like a bit of a threat.

But now it is not that real estate is not developed, but overheated. Moreover, the fundamentals of the economy’s long-term improvement have not changed. Moreover, the fact that the economic growth target was not mentioned this year is not to say that it is not important. It can't be more threatening.

So, in a word, you don’t have to worry about the market staying cold or worrying about housing prices going up. Dong Fan is wrong if he wants to take the opportunity to loosen control, and it is wrong to let real estate play a short-term role in boosting the economy.

This article is a rebuttal to Dong Fan, but also a message to the growing number of speculators and investors who believe Chinese policymakers actions speak louder than their words. China has signaled loose monetary policy will continue this year. Land prices have jumped as a result, an early warning sign for prior housing bubbles. Whenther China wants one or not, it has chosen a path that has always led to housing speculation over the past decade. Right now, it looks like the central bank is following Dong Fan's advice whether they like it or not.

And moments after I posted came this at ZH: China Launches QE To Jumpstart Economy
PBoC transcript here: 金融支持稳企业保就业新闻发布会文字实录