Still on the Road to Capitalism? Weighing the Visible Hand of Government Intervention in the Chinese Property Market

Tao Zhu, Killian J McCarthy
(University of Groningen School of Economics & Business, The Netherlands)

Abstract: This paper introduces a model to describe the Chinese property market. In doing so, the aim is to comment on the applicability of the current property “market models”, but also to discuss China, and the current state of its journey to capitalism. We use a straightforward empirical model, and employ data, collected in the period 2000–2010, on the market performance of the real estate industry. We find that “market models” explain as little as 1% of the variance in property sales. Adding a variable that accounts for government intervention to the specification creates a “regulated market model”. And with this specification, the predictive power of the model soars to 87%. In the “regulated market model”, however, the significance of the price system disintegrates. Meaning that government supply, and not price, dominates. The implications of our study are significant. Because, not only do we evidence the important role of government’s “visible hand” in the Chinese property market but, by implication, illustrate that China remains a controlled economy.

Key words: property markets; China; capitalism; socialism; government intervention

JEL codes: D04, O18, O53, P11, P21, P51, R31, R52