Japan's macro controls offers lessons to China

China's real estate prices are once again skyrocketing after a short depression that the central government's tight controls created. This is a challenge that Chinese decision-makers need to solve with extra caution, says an article in 21st Century Business Herald. Excerpts:

Japan's experience in the late 1980s can serve as a lesson for China. A retrospect of recent history will show how complicated the central bank's controls could be. For example, just as the central bank failed to have actual control of the final trend and use of bank credit, the risks that property developers faced were in fact far beyond the bank's control. Though the credit of real estate development seemed under control, asset prices continued to soar.

The difficulty of establishing control over the risks from uncertain credit expansion and quantitative evaluation is also rather prominent in China. After the rise in housing prices in 2009 and 2010, the government initiated regulations and controls in the real estate market, which led to a welcome price drop in both housing prices and investments in the first half of this year.

However, a considerable price rebound soon emerged, which will very likely trigger stricter adjustments and control measures. Worse, the risk in fact exists that the fight against real estate bubbles may curtail economic growth.

The risk China now faces is relatively less severe than Japan in the 1980s due to the low level of household debt and rigid demand caused by urbanization, but it is still worth examining whether the diversified and complicated financial tools that have emerged in China in recent years have been an effective method of control.

Japan's lesson tells us the distraction caused by decision makers' fears of an economic downturn and bubbles is in fact increasing, especially when the economic and financial system undergoes rapid changes. Housing-price level and support measures are equally necessary to set policy goals. It would also be a practical choice to gradually separate part of the risks from the banking system via institutional reform.