Bank of Japan Deputy Governor Kiyohiko Nishimura said on Tuesday that China is now entering the "danger zone", citing a combination of demographic change, a property price bubble, and a steep loan growth, which increases the risk of financial crisis in a country.
Speaking at the Reserve Bank of Australia-BIS Research Conference in Sydney, Nishimura said not every bubble-bust leads to a financial crisis and not every country experiencing demographic changes has a malign property bubble.
"Rather we should regard the demographic conditions of population dividend as "fertile ground" for malign property bubbles," he added.
The Japanese policymaker likened his country's property bubble of the 1990s to the U.S. house price bubble of the 2000s. Both had peaks in the working-age population ratio, real property price index and real total loans.
However, China has not yet peaked with respect to working-age population ratio, but it is close, the policymaker cautioned. Also, there was a clear upsurge in property prices up to 2010 as per the data available and the real total loan also showed a tremendous increase, according to Nishimura.
While dealing with the bubble, communication with the public becomes the most problematic of all, he said. "It is extremely difficult to persuade people who believe "this time is different" and are convinced they are now on the foothills of eternal prosperity, just as long as their path is not blocked by some stupid policy maker," he noted.
In the late stage of a bubble, there is a danger of restraining policy being "too little, too late", and just postponing the collapse until a later stage and on a larger scale, he warned. On the other hand, however, there is also the danger of too bold a policy leading to an "over-kill" of the economy, Nishimura said.
He suggested that policymakers should form it their research agenda in the immediate future to look into what would be an appropriate policy for the late or collapsing stage of a malign bubble.
by RTT Staff Writer
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