Ask home developers to cut prices, save market

I think there are two reasons behind. For one, the real estate developers have won strong support from local governments. Since the end of last year, China's central bank has eased the monetary policy by lowering the reserve requirement ratio and interest rate. To them, it is a strong signal of bailout from the central government, so they have the confidence to make a decision of increasing their investment that is against market forces.

The second reason is that these developers have long been spoiled by a surging housing market. They believe, no matter how wrong it is, that housing prices will keep rising and the momentum will never come to an end because the country's urbanization is far from finished. As such, they think the property market will keep its bull run amid the accelerating urbanization.

That's a lie they make up, but they believe it and keep living in it. Nothing can make them cut property prices because they fear a dropping price will lead more people to take a wait-and-see attitude. That would be a vicious circle. More importantly, they got the back of local governments some of which even choose to punish those who cut housing prices.

They never came to understand what it means after the real estate investment and prices have been surging for more than a decade. When there is a huge stock already, there will be huge glut in an industry that has kept expanding at a rate of over 20 percent for more than 10 years. This is true for many industries, like household appliances and steel industries.

The asymmetric adjustment between demand and supply means more houses will be built but fewer can be sold. That will lead to an increasingly huger stock than the market can handle. The longer such a situation persists, the greater the risks will be in the real estate and financing markets. Local governments must put a brake on the "bailout" policy by encouraging developers to reduce the housing prices to boost demand, while curbing investment as an synchronized adjustment to cut supply. This will speed up the process for the market to clear the stocks.

When trying to salvage the housing market, we cannot rely on an anti-market force to buck the trend. When the demand becomes weaker amid adjustments, we have to act on the price and supply. Once the housing price drops, the demand will rise. Stabilizing the price and investment will only lead to an increasingly shrinking demand, hindering economic cycling and stagnating the real estate market amid the lack of capital liquidity.

There's nothing to fear when housing prices and investment drop amid adjustments. It is just a process that squeezes out bubbles and prevents financial risks. Good news will come along. For instance, it will help boost China's urbanization, narrow residents' income gap and propel the development of real economy. It's especially helpful for more funds and resources to flow into industrial upgrading and innovations.

It is the long existence of real estate bubbles that can block industrial upgrading, expand the income gap and impede the urbanization.

The author is a researcher at and vice director of Department of Policy-making Consultation of the Chinese Academy of Governance. The views do not necessarily reflect those of China Daily.