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Assets bubbles and their macro management

Comments on Takatoshi Ito “China’s property bubble worse than it appears”, 23/03/2010, http://www.eastasiaforum.org/2010/03/23/chinas-property-bubble-worse-than-it-appears/

It is more than likely that the housing bubbles in China are more serious than the official statistics shows and are likely to be a huge challenge to the Chinese authority in managing its economy as a whole.

China may be doing slightly better than Japan did back then, due to a number of reasons.

The first is that China is unlikely to completely bow to the US and EU pressure for currency appreciation, like Japan did in the Plaza accord. China may allow some appreciation when time is right, but that is likely to be tightly managed.

Secondly, repeated historical lessons of bubbles and bursting and their effects on the real economy may be learnt, that is, how to prevent bubbles from forming, growing and bursting too rapidly. I think China should be able to and can do better. When there are bubbles, the important task for the authority is not to burst but to manage the bubbles.

To use an analogue, when there is hyper inflation, the task is not to move the price back i.e. to deflate it rapidly, but to stop the further inflation. Managing bubbles is not completely the same as that, but has some similarity.

Thirdly, China's capital market is not as free as Japan was or other major western economies, and its monetary authority has more instruments to use than its overseas counterparts.

Fourthly, the stage of Chinese economic development now is different from that of Japan in the late 1980s or early 1990s, and there is enough room for expansion including fiscal expansion to smooth out the similar problems that Japan faced back then, or the US is facing now.

So in my view, while the housing bubbles in China is potentially more problematic, China should have the capacity and instruments to manage them and manage them in a much better way.

Certainly, if I had the authority to manage the Chinese economy, I would be highly confident to do it successfully, much more so than any other western countries in their recent history.

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