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Housing price bubble, sterilization and foreign exchange accumulation in China
Wang, Chieh Hsuan
Hwang, Jen Te
Wang, Chieh Hsuan
|Issue Date:||2013-09-02 17:19:33 (UTC+8)|
In the context of the constant buildup of China’s foreign exchange reserves, the PBC has undertaken a series of sterilization operations to alleviate excessive liquidity and inflationary pressure resulting from huge funds outstanding for foreign exchange. However, the growing costs of sterilization have also impacted the effectiveness and sustainability of the foreign exchange surplus sterilization policy. Therefore, the first part of this dissertation is to examine the sterilization policy in China. Within a microeconomic framework, we incorporate the housing price variable into the target loss function of the monetary authority to explore its financial capabilities and evaluate the effectiveness and sustainability of China’s sterilization policy. The empirical results show that Chinese monetary authorities sterilize almost all of the effects of international capital inflows and increasing foreign exchange reserves on the monetary base. That is, increased capital mobility does not sabotage the independence of the Chinese monetary policy. Nevertheless, analyses of the sustainability of sterilization policy indicate that the sustainability of the monetary sterilization policy has been seriously challenged since March 2008, which suggests that Chinese monetary authority has endured tremendous pressure for unsustainable sterilization.
In the context of rising foreign exchange reserves and monetary authorities being unable to sterilize all funds outstanding for foreign exchange due to foreign exchange market interventions, increases in asset prices have gradually made people question the interaction between short-term capital inflows and asset prices that contributes to asset price bubbles. In order to investigate the relationship between short-term international capital inflows and asset markets. A structural vector auto-regressive (SVAR) model is used to explore the effects of the incompletely sterilized monetary base and short-term international capital inflows on the Chinese stock markets and real estate markets in the second part of this dissertation. The empirical evidence demonstrates that the relationship between short-term international capital inflows and asset prices is self-fufilling and mutually reinforcing. The incompletely sterilized monetary base further exacerbates asset price bubbles, which suggests that short-term international capital inflows and excess liquidity will gradually escalate the severity of asset price bubbles.
With an over-abundance of funds and a shortage of other viable channels of investment in China, such circumstances tend to encourage investments and speculations in the stock market and real estate market. Consequently, this causes China’s stock market to fluctuate and prices of real estate are being driven up in China. Following China’s reform and economic development in recent years, the nation’s real estate industry has rapidly evolved into a pillar of China’s national economy and the economic bloodline in some cities. As such, acquiring sufficient understanding of China’s real estate market for an accurate assessment of the risk of a housing price bubble has become an issue that requires immediate attention.
In order to discuss the extent and severity of real estate bubbles in China. The third part of this dissertation uses the maximum likelihood method through the use of a state space model and recursive computation of the Kalman Filter to estimate the housing price bubbles in China. Results of empirical analyses reveal that price bubbles do exist in housing markets of Beijing, Shanghai and the whole of China in general. Although the proportion of price bubble to house price in China has shown a moderate decline due to the Chinese government’s adjustment of its real estate policies, price bubbles remained as high as 27.99% in the fourth quarter of 2012. Empirical analyses of Beijing and Shanghai residents’ disposable income and housing prices revealed that the proportion of price bubble to house price in the two cities has exceeded 48%, which suggests that housing price bubbles remain a significant issue to be addressed.
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