Research | Xiong Wei and Zhang Jinfan: Price and Volume Divergence in China’s Real Estate Markets: The Role of Local Governments
In a collaborative study titled Price and Volume Divergence in China’s Real Estate Markets: The Role of Local Governments by Professor Xiong Wei and Professor Zhang Jinfan from the School of Management and Economics (SME) at The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen), alongside Wang Yuheng, a graduate from MPhil-PhD in Finance at SME, CUHK-Shenzhen and now a Professor at the Central University of Finance and Economics, an unusual “price-volume divergence” is found in China’s urban real estate markets during the COVID-19 pandemic (2020-2022), where prices for residential land and new homes rose while transaction volumes declined significantly. This phenomenon, inexplicable by classical efficient market or behavioral economics theories, stems from active price management by local governments to maintain fiscal revenue and debt sustainability.
The paper elucidates China’s unique strategy for managing the bursting of real estate bubbles. After Japan’s bubble burst in the 1990s, the government failed to implement effective interventions in time. The sharp decline in housing prices caused significant economic losses through collateral depreciation and the deterioration of financial institution and corporate balance sheets, leading to long-term stagnation. In contrast, during the 2008 US housing bubble burst and subprime crisis, the government swiftly adopted ultra-loose monetary policy (QE), injected capital into financial institutions (TARP), and purchased real estate-related financial assets (Agency MBS), mitigating the impact on the real economy and facilitating a faster recovery. Unlike Japan’s passive response or the US’s systemic financial bailouts, China’s approach to resolving the real estate bubble involves direct micro-intervention in the market—taking measures on both supply and demand sides to slow the adjustment of land and housing prices at the cost of transaction volume—to alleviate the immediate impact of collateral depreciation and protect the financial system. While China’s gradual and quiet approach to deflating the property bubble buys more time for structural adjustment, it also harbors latent risks.
The research paper was published in the Review of Financial Studies, a top-tier international finance journal.
About the Authors
Xiong Wei
Academic Dean, SME, CUHK-Shenzhen, and Professor (Princeton University)
Research Field
Capital Market Frictions, Behavioral Finance, and China’s Economy and Financial Markets
Zhang Jinfan
Associate Professor
SME, CUHK-Shenzhen
Research Field
Chinese Economy, Capital Markets and Financial Institutions, and Digital Economy
Co-author
Yuheng Wang
Central University of Finance and Economics
