M2 and Asset Price Bubble

Published on Author kuveke

China's real estate

While the stimulus conducted in the U.S. has been a hotly debated topic most Americans are unaware that Chinese stimulus spending has outpaced the U.S since 2009. The People’s Bank of China has been stimulating the economy by issuing more renminbi, the official currency of China, and then buying dollars in currency markets to slow the renminbi’s appreciation against the dollar. By minimizing its currency’s appreciation China is keeping its exports inexpensive and keeping its trade surplus high. However, a worry of this strategy is the asset bubble that has been created, especially with regard to real estate.

The money supply has tripled since 2006 as measured by M2 the , increasing by 30% in 2009 and by 13.6% in the past year. In comparison the inflation adjusted growth rate is 7.6%. Economists worry how the central bank can slow the growth of money supply without causing a slump in real estate. At the same time real estate has become extremely expensive in and around cities so that young people entering the work force have found that it will be impossible for them to purchase a home. In the next few years a fierce policy debate will go on between need for growth and investment and the need to slow the asset bubble.

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3 Responses to M2 and Asset Price Bubble

  1. This is an interesting article especially when compared to the US economy. Ever since the real estate collapse of 2008 China should be wary about a bubble burst. The inflation rate will have to come down eventually and it will be interesting to see how China plans to do this without bringing the economy down as well.

  2. I agree with Brister that this is an interesting article.
    I had no idea China was going through a similar situation as US did with its housing bubble. I am really worried about bubble burst. If its inflation keeps on rising and the bubble finally pops, how would the Chinese government react?
    I do not think China has the power yet to deal with this kind of problem.

  3. Who holds the debt used to finance real estate purchases? Or are the purchases paid for in cash?

    The experience of many economies however is that it’s challenging to link one or another metric of “money” with changes in the prices of one class of assets, here “real estate”.

    Finally, what metric should we use to measure trade? Shouldn’t it be net trade as a share of GDP? How does that change (or not!) our interpretation?