Yuan Tian and Kevin P. Gallagher
China is taking significant steps to open up its capital account, while easing controls on its interest rates and currency exchange. The prospects for further capital account liberalization will depend on how China avoids the potential pitfalls of a more open system. Our new paper “Housing Price Volatility and the Capital Account in China” focuses on the effects of the capital account policy changes on China’s housing market.
China experienced significant housing-market volatility from 2005 to 2013. Economists analyzing the determinants of volatility in these markets find that the recent housing bubble was largely driven by factors specific to the Chinese economy and Chinese economic policy. In our paper, we examine the extent to which a) short-term international capital flows may have impacted prices and volatility in the Chinese housing market and b) whether China’s 2006 Capital Account Regulations (CARs) on foreign purchases of Chinese real estate were effective in reducing the level and volatility of prices in China’s housing markets.
We found that short-term capital flows from abroad had a modest impact on price increases in the Chinese housing market, but a more significant impact in increasing market volatility. The 2006 CARs, meanwhile, did not appear to have an impact in reducing housing prices, but did have a strong impact in reducing housing-market volatility. Short-term “hot money” flows magnified the impacts of capital flows on housing prices during upward surges in housing prices.