The Political Economy of Financial Repression Policy-Dominated China’s Overheated Housing Market

Abstract

Chinese government has adopted financial repression policy for a very long time as a necessary step to stimulate domestic growth and help eliminate domestic and external risks. In China, a series of financial repression policies have been implemented, such as explicit or indirect capping of interest rates and protection of state-owned enterprises. However, its side effects are inevitable simultaneously. Under these financial repression policies, state-owned enterprises (SOEs), banks and governments could be the three biggest beneficiaries since they can easily get founds and profits to finance themselves through the policies while private and small firms are actually discriminated and can get very little benefit from the policy. At the same time, the long-term implementation of repression policy has triggered domestic housing speculation since 2008 when financial crisis caused by U.S subprime crisis swept the world, which then further fueled an expansion in debt that makes Chinese banks quite risky. Thus, in the past several years, the over high housing price and the huge amount of bank loans in real estate sector in China’s real estate market has become a controversial topic and arouse people’s attention all over the world. Policy makers and scholars are worried that China’s overheated housing market may lead to bank debt crisis in the near future like the U.S. Therefore, in this paper, we tried to answer two main questions: What kinds of side-effects have been caused by China’s financial repression policy after its economy boom? What kind of role did China’s financial repression policies play in inducing its domestic overheated housing market? Is the bank credit, or debts problem induced by housing purchasing and investing severe enough to lead to a higher level of credit risk in China?