China's Housing Market: A Reflection of Domestic Investment Challenges

Hannah Luddy Randolph

Abstract


China’s recent high rates of growth and economic transformation have produced much debate over the reasons for and sustainability of its success. In addition to questions pertaining to the effects of China’s growing economy, many scholars and analysts are beginning to study how the Chinese economy functions. Given China’s current and future importance to the world economic system, it is becoming more important to analyze China’s economy, especially challenges that might potentially weaken or substantially change China’s economic future. Such challenges include problems arising from continuing reforms of the old socialist system, from the transition to a more capitalistic system, and from the economic modernization that all developing nations experience. China’s investment structure, particularly its domestic investment, is perhaps one of the most important economic areas in which these problems occur.

The housing market in China is a microcosm of Chinese investment structure as a whole, and thus provides insight into the current state of the economy and its possible futures. The question thus arises, how does the housing market reflect wider problems in China’s investment structure, and how might these challenges affect China’s economic future? Using a case study of China’s housing market, this paper explores the wider issues of China’s investment structure and uses this exploration to partially explain the operation of domestic investment specifically and the Chinese economic system in general. This case study is drawn from academic and news articles, academic research papers, and economic data from governmental and non-governmental sources.

Through examination of the investment structure of China, it is possible to see that restrictions on private investment and the heavily government-directed investment environment are distorting China’s domestic investment opportunities and projects in comparison with other countries. Due to the privatization of the housing sector in 1998 and the high rate of urbanization that China has sustained in addition to distorted investment, China’s households hold a disproportionate of their savings in housing. All of these factors have further combined to create rising housing prices, a shortage of affordable housing, and a dearth of other investment opportunities for Chinese households. These results have contributed to increasing wealth disparities and the possibility of a housing bubble that may cause global issues. Though these concerns do not necessarily indicate that China’s growth is unsustainable, they do indicate wider problems in the Chinese economy that must be addressed in order to sustain Chinese growth. In accordance with these observations, the Chinese government would be wise to reform the investment system by further privatization of the system and the deregulation of private investment.


Keywords


China, domestic investment, housing bubble

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