Asset Bubble: International Experience and Current Situation in China

Foreword

Economic bubbles have run through the history of modern global economic development from the Dutch Tulip Bubble in 1630 to the international financial crisis in 2008. The burst of economic bubbles each time would lead to an economic and financial crisis and gravely shock regional economy and even global economy. Especially since 1970, with the swift development of economic globalization, economic bubbles have gradually shifted from the initial commodity market to the stock and real-estate markets and even extended to the field of financial derivatives. Economic crises triggered by the burst of economic bubbles clearly occur with a higher frequency and on a broadening scale, causing an increasingly adverse impact to global economy. Following the international financial crisis in 2008, there broke out a fiscal crisis in California, US and a sovereign debt crisis in Europe. A financial crisis induced by the burst of economic bubbles is transforming into fiscal and debt crises.

After thirty years of rapid and sustained development, China has entered a period with severe excess liquidity. In view of other countries' development experience, excess liquidity does not necessarily bring on a price hike in the real economy. However, the pouring of excess liquidity into asset markets can inevitably give rise to a sharp increase in asset prices, which is a trigger to economic bubbles. Presently in China, bubbles are looming up in asset market, especially in the real estate market. Local governments' huge hidden debts involve high fiscal and financial risks. To prevent excess liquidity from evolving into economic bubbles in China, the Research Department of Macro-economy of DRC set up a research team to conduct comparative analysis on the basic laws of economic bubbles in other countries, the tendency of bubble economy and local debts in China. Drawing on other countries' experience and lessons, the team has advanced a series of countermeasures for guarding against and defusing local hidden debt risks.

To make better use of the research findings, we have incorporated all the research papers into a book as a reference for readers. It is hoped that what we have done could draw concern to the issue of economic bubbles in China as well as to the ways for fending off and defusing the financial risks. It is also our wish that China's future economic development could prevent the recurrence of the financial and sovereign debt crises once happened in Europe and US.

This book, with over one hundred thousand words, is an outcome of the efforts and Endeavour made by all members of the research team. The Introduction is co-written by Yu Bin, Director-General of the Research Department of Macro-economy (DRC) and Li Jianwei, Deputy Director-General of the Research Department of Social Development (DRC). Chapters 1, 4 and 5 are written by Ren Zeping from the Research Department of Macro-economy (DRC). Chapter 2 is written by Dai Hui from the Research Department of Macro-economy (DRC). Chapter 3 is written by Deputy Director-General Li Jianwei. Chapter 6 is written by Zhang Junwei from the Research Department of Macro-economy. Chapter 7 is co-written by Chen Changsheng, from the Research Department of Macro-economy and Xu Zhaoyuan from the Enterprise Research Institute (DRC). Chapter 8 is co-written by Sun Bin and Tang Tao from the Financial Research Institute of the People's Bank of China (PBC). Chapter 9 is co-written by Wei Jianing, Deputy Director-General of the Research Department of Macro-economy and Sun Bin from the Financial Research Institute of PBC. The layout and proofreading of the book are undertaken by Wang Yingying from Research Department of Macro-economy.

Research Team on "Asset Bubbles in China"

Research Department of Macro-economy

Development Research Center of the State Council (DRC)

Table of Contents

Introduction

Chapter One Origin of Economic Bubbles and History of European Capitalist Economic Crisis

1. Three Speculation Events and Economic Bubbles in Early European Economic Development

2. History and Causes of the European Capitalist Economic Crisis

Chapter Two Experience, Lessons and Revelations of Japan's Heisei Bubbles to China

1. Rise, Burst and Consequence of Japan's Bubble Economy

2. Causes for Japan's Bubble Economy

3. Revelations of the Heisei Bubbles to China

Chapter Three Root Causes and Impacts of US Financial Crisis and Revelations to China

1. Root Cause One of US Financial Crisis: Burst of Real-estate Bubbles

2. Root Cause Two of US Financial Crisis: Burst of the Mortgage-backed Security and Financial Derivative Bubbles

3. Root Cause Three of US Financial Crisis: The Burst of the Subprime Mortgage Bubbles Incurred Huge Losses to the Value of the Global Financial Derivative Market

4. Intrinsic Tendency in the Development of US Financial Crisis

5. Conclusions and Policy Options

Chapter Four California's Fiscal Crisis and Revelations for China's Local Debt Risk Management

1. Formation of California's Fiscal Crisis

2. Underlying Causes of California's Fiscal Crisis

3. of California's Fiscal Crisis and Revelations for China's Local Fiscal Risk Management

Chapter Five Analysis of the European Sovereign Debt Crisis and Prospects for Future Economic Performance

1. Formation of the European Sovereign Debt Crisis and Countermeasures

2. Causes of the European Sovereign Debt Crisis

3. Impact of the European Sovereign Debt Crisis on the World's Economy and China's Economy

4. Analysis of the European Current Economic Situation and Prospects for Future Development

Chapter Six Asset Price Bubble in China: Causes, Development Trend and Policy Options

1. Development of China's Asset Market

2. Formation and Development Mechanisms of Asset Bubbles

3. Analysis of the Asset Price Bubble in China

4. A Multi-Pronged Approach to Deflate the Bubbles on a Gradual Basis

Chapter Seven Currency Shocks, Characteristics and Price Fluctuations in Different Sectors Fluctuations

1. Literature Review

2. Currency Shocks and Characteristics of Price Fluctuations in Different Sectors

3. Empirical Examinations on Currency Shocks and Price Fluctuations in Different Sector of China

4. Major Conclusions

Chapter Eight Relationship between Local Government Financing Vehicles and Asset Bubbles in China

1. Analysis of Local Government Financing Vehicles

2. Analysis of Local Government Financing and Asset Price Bubbles

3. Relationship between Local Proceeds from the Transfer of Land-Use Rights and Real Estate Prices

Chapter Nine Measures to Resolve Risks for Local Government Financing Vehicles

1. Development of Local Government Financing Vehicles 2. Problems with Local Government Financing Vehicles

3. Potential Risks for Local Government Financing Vehicles

4. Causes of Risks for Local Government Financing Vehicles

5. Risk Resolution of Local Government Financing Vehicles

References

About the Author

Yu Bin is member of DRC's Leading Party Members' Group and concurrently Director-General of General Office and Director-General of Research Department of Macro-economy of DRC. After his graduation from Department of Economics of Peking University, he worked as a teacher in Department of Economics of Zhejiang University from 1987-1989. From 1989-1992, he studied contemporary Western economic theory in the Department of Economics of Peking University and got a Master's Degree in economics. From 1992 onward, he has been working in DRC and taken the posts respectively as Deputy Chief and Chief of Research Office of Department of Comprehensive Research, Confidential Secretary of General Office, Deputy Director-General of Enterprise Research Institute, Deputy Director-General of Research Department Macro-economy, Vice President, President and Secretary of Party Committee of China Economic Times as well as Associate Editor-in-Chief. He is a research fellow and enjoys government special allowance.