Why is it happens? (Outside reasons)

The outside reasons (the reasons outside the real estate industry, such as the economic environments, financial policies, and so on) of the Chinese housing bubbles can be separated in to two main areas which is the effects of liquid expansion and funding mismatch in fictitious economy markets.

Firstly, housing bubbles in China have roots in liquid expansion. The liquid expansion in China is caused by the Chinese foreign exchange holdings. Because of Chinese government implement compulsory sale and purchase foreign exchange policy. Therefore, the changes in foreign exchange reserves will directly leads to the change in monetary base of central bank, and then affect the supply of currency in China. From 1999 to 2009, the Chinese foreign exchange holdings have increased 12.5 times and foreign exchange reserves have increased 15.5 times. In the end of 2006, the scale of foreign exchange holdings is greater than the amount of monetary base, the percentage in M1 and M2 (Money supply) is 66.9% and 24.4% (data come from National Bureau of Statistics of China). In the end of 2009, the scale foreign exchange holding is 1.2 times of the amount of monetary base, the percentage in M1 and M2 is 79.1% and 28.7%. Just as I have introduced, the increase of foreign exchange holdings directly increased the amount of monetary base. And then, through the amplification effect of the money multiplier, it increased the currency supply, and finally leads to liquid expansion.

Secondly, the funding mismatch in fictitious economy markets is the other important reason. In general, bond market, security market and real estate market is the main market to absorb liquid. However, in China, the scale of Chinese bond market is still small, does not have enough ability to absorb liquid. The share market in China was the main market to absorb liquid. However, the bubble burst of security market in 2007 fuelled heavy flows out of equities and into real estate market. This let the over liquidity in real estate market and finally support the real estate bubble.