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Bubble Economics How Big a Shock to China’s Real Estate Sector Will Throw the Country into Recession, and Why Does It Matter?

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Listed:
  • Michael, Bryane
  • Zhao, Simon

Abstract

How far do China’s property prices need to drop in order to send the country into a recession? What does this question tell us about the way Bubble Economies work? In this paper, we develop a theory of Bubble Economics – non-linear and often “systemic” (in the mathematical sense of the word) forces which cause significant misallocations of resources. Our theory draws on the standard elements of most stories of Bubble Economics, looking at the way banking, construction, savings/investment, local government and equities sectors interact. We find that Bubble Economies’ GDP growth can depend on property prices changes differently at different times -- depending on risks building up in the economy. We argue that a tacit, implicit Bubble Risk Factor might provide a way of understanding a key variable academics and practitioners omit when they try to explain how economies (mis)allocate resources during bubbles. A 15%-20% property price drop could cause recession, if China’s economy resembles other large economies having already experienced property-related asset crises. However, a 40% decline would not be out of the question.

Suggested Citation

  • Michael, Bryane & Zhao, Simon, 2016. "Bubble Economics How Big a Shock to China’s Real Estate Sector Will Throw the Country into Recession, and Why Does It Matter?," EconStor Preprints 141314, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:141314
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    References listed on IDEAS

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    More about this item

    Keywords

    China recession; bubble economics; fragility; housing bubble;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • G01 - Financial Economics - - General - - - Financial Crises

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