Feb 28, 2012

Increasing Likelihood of Policy Error in China

With the upcoming once-in-a-decade leadership transition, many inconsistencies are showing up in China's monetary and fiscal policies. The most famous example was with the relatively small city of Wuhu in southern China, which tried to implement incentives to spur home purchases, only to retract them later, with a fairly unconvincing explanation. More recently the government of Shanghai announced a plan to ease restrictions on purchases of second homes, which is certainly at odds with the central government's stated goal of trying to cool the housing market.

Undoubtedly a lot of the inconsistencies are due to different entities and midlevel communist party
cadres trying to manouver themselves into a more powerful position under the new leadership. However even discounting that, the current lack of policy coordination is disconcerting. It looks as if the local governments are trying to deal with the critical on-the-ground issue of developpers quickly going bankrupt while Beijing is focusing on the big-picture of the unsustainable housing bubble. The two objectives are fundamentally contradictory.

(For other WhatIf posts, click here)

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