The first break down of China’s market economy

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A real estate bubble or housing bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and usually followed by a rapid increase in the market price of real property until they reach unsustainable levels and then decline.【1】

An economic bubble is an inevitable issue when a speculative opportunity occurs, and assets are traded at prices deviate from their intrinsic value. When the market continuously operates in an abnormal state, the risk will accumulate rapidly to the edge of a financial crisis. Hence, bubbles are often related to the overheated markets, defects of banking and regulation systems and frauds. 


China is known for its stable economic policies as the government remains a dominant position in economic management. 
Did China ever encounter with a bubble?
The answer is YES.

Looking back to the 1990s, a decade since China conducted reform and opening-up policy and embraced the market-oriented economy in 1978, a real estate bubble emerged out of dramatic changes in the economy. The bubble, which grew with the establishment of Hainan province and the development of the real estate, made both fortune and disaster for the newly born market and remains an important, yet unnoticed memory of China’s rapid development. 


Where did the bubble emerge?
It all started in Hainan, an island which means the southern of the sea in Chinese, is the southernmost province in the South China sea. 
Being the only province owning tropical climate, Hainan is famous for tourism and tropical agriculture. According to the Hainan tourism commission and statistics bureau, approximately 9 million of Chinese domestic tourists traveled to Hainan in 2019, Hainan’s agricultural output was about 120 billion.【2】



However, the province of sunshine and wonderful coastline has witnessed China’s the first market economy bubble of real estate, and the burst of bubble finally led to a regional financial crisis, one of the state-owned banks, Hainan Development bank closed in 1998, was the first state-owned bank that ever ended bankrupted in China. 





What was it like when living in a growing housing bubble? Here are some figures.
From 1991 to 1993, the average housing price of Hainan increased 4.3 times to 7,500/sqm, nearly 27 times of national average monthly wage of workers. 
   Over 20,000 real estate companies were founded in the province, the number of Hainan’s population was only 6,000,000.


The bubble was expanded in a complex situation. China's economic reform has built a  foundation for establishing special economic zones as experiments of policies. while the government decided to take a try on turning the housing policies from non-tradeable to trade free. Hainan was both the youngest province and the largest special economic zones, the changes in housing policy attracted millions of people. It was absolutely a Chinese version of gold crush.

   It’s hard to imagine how the bubble and the crisis happened at that time, but there were definitely certain factors that maybe the key to find out the common reasons for bubbles.

   To learn about the housing bubble, check this video:
    

[1] "Defining a Real Estate Bubble -americanmonetaryassociation.org". americanmonetaryassociation.org. 2012-08-04. Retrieved 2018-11-28.

Thank you so much for reading!
    I’ll write about the bubble’s origin and growth in the next blog. If you have any questions or suggestions about the blog and other economic issues, please feel free to comment below the blog.










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