Former Head of China’s Central Bank Suggests Policymakers Should Learn From Japan

Residential buildings under construction by Chinese real estate developer Vanke in Hangzhou City Zhejiang Province, China, on March 31, 2024. AFP via Getty Images

Zhou Xiaochuan, former governor of the People’s Bank of China, the country’s central bank, called the latest downturn of China’s real estate market “unprecedented” and suggested that “policymaker[s]” should learn from Japan’s experience.

The Chinese communist regime introduced measures, dubbed the “5·17” policy, on May 17 designed to rescue the housing market. Subsequently, three major cities—Shanghai, Guangzhou, and Shenzhen—followed suit with policies to lower the barriers to home purchasing.

On May 27, Shanghai, one of China’s four first-tier cities, announced the “New Nine Rules of Shanghai,” becoming the first to implement the “5·17” policy. The policy changes include reducing the minimum social security or individual income tax payment period required for non-local purchasers from five years to three years, allowing non-local single individuals to buy one second-hand home citywide, reducing the down payment for the first home purchase using a commercial loan to 20 percent, and lowering the interest rate to 3.5 percent.

Following Shanghai, Guangzhou and Shenzhen also introduced similar policies.

On May 28, Guangzhou reduced the minimum social security or individual income tax payment period in restricted purchase areas from two years to six months, the lowest among first-tier cities. Guangzhou also canceled the lower limit on interest rates for commercial loans on first and second homes, reducing the down payment ratios to 15 percent and 25 percent, respectively. Buyers who have settled previous loans can obtain loans for a third home without restrictions on property sales.

On May 29, Shenzhen announced a reduction in the minimum down payment ratio and the lower limit of interest rates for home loans. The down payment ratio for a first home was lowered from 30 percent to 20 percent, and for a second home from 40 percent to 30 percent.

According to data from the Centaline Property, over 80 percent of cities in China have started implementing the “5·17” policy. Out of more than 300 cities at the prefecture level or above, over 200 have implemented a 15 percent down payment ratio for first homes, and over 250 have canceled the lower limit on home loan interest rates.

Learning From Japan

However, the top Chinese Communist Party (CCP) authorities do not seem optimistic about the ‘5·17’ policy’s ability to alleviate the housing market crash’s impact on China’s economy. They are also worried about a potential financial crisis triggered by the real estate crisis.

On May 21, just four days after the “5·17” policy was introduced, He Lifeng, the office director of the Central Financial Commission, warned about the need to “firmly hold the bottom line of preventing systemic risks,” in order “to prevent and control intertwined risks such as real estate risks, local government debt risks, and risks of local small and medium-sized financial institutions,” all of which are related to the housing market crash.

Zhou Xiaochuan, former governor of the People’s Bank of China who retired in 2018 and has been out of the public eye since, commented on the issue recently. Not seeming optimistic about the “strongest rescue measures ever” introduced by the authorities, he instead suggests “learning from Japan’s experience.”

The latest downturn of China’s real estate market is unprecedented, and the market is declining faster than policymaker[s] expected, Mr. Zhou said in an interview on May 23.

Under the current political atmosphere where all party and government affairs must be “decided by one,” the specific mention of the “policymaker” was taken by some analysts and experts as Mr. Zhou sending a reminder to the CCP leader, Xi Jinping.

“The fact that the housing market is declining faster than expected indicates that Xi’s administration has misjudged China’s economic situation and its future trends, and has also overestimated the purchasing power of the people,” Mike Sun, a North America-based investment adviser, told The Epoch Times.

Mr. Zhou also suggested learning from other countries that have taken many years to address real estate bubbles, particularly Japan.

After the real estate bubble burst, Japan introduced many related policies. One significant measure was establishing the Resolution and Collection Corporation to restructure financial institutions and handle a large amount of bad assets.

The Japanese flag flutters over the Bank of Japan head office building in Tokyo, on April 27, 2022. Kazuhiro Nogi/AFP via Getty Images

In 2002, the Bank of Japan, the country’s central bank, formulated a plan to address bad debts. Not only did it aim to deal with the negative legacy of the bubble economy, but it also sought to gradually improve the industrial structure. Under the pressure of business transformation and adjustment, the plan aimed to enhance the ability to manage newly emerging bad debts. This required adjusting Japan’s economic structure, which was closely linked to finance and industry.

The Bank of Japan believed that while addressing bad debts, it was necessary to strengthen the profitability of financial institutions and enterprises, and constantly review the financial system, the supervision of financial institutions’ business operations, and the tax system. Moreover, to solve the problem of bad debts, it was indispensable to enhance corporate profitability and achieve business regeneration from the perspective of industrial and regional policies.

Zhou’s Previous Reminder to Policymakers

The suggestion to “policymaker[s]” of learning from Japan’s experience by Mr. Zhou is reminiscent of his previous comments during the U.S.-China trade war, where he was seen as indirectly criticizing Xi for “not understanding economics,” potentially exacerbating U.S.-China relations.

In May 2019, when the U.S.-China trade war was likely to escalate, Mr. Zhou commented on the global economy in a forum in Beijing. He stated that some newly inaugurated leaders completely violated economic theories and common sense, relying mainly on business intuition in their system and policy choices. Practices disrespecting science and predecessors’ accumulated theories and knowledge would eventually hit a wall, he said.

While Chinese media claimed that Mr. Zhou was indirectly referring to then-President Donald Trump, the remarks were widely understood as implicitly criticizing Xi Jinping for “only talking about politics but not understanding economics.”

“Economics has not been as popularized and deepened as imagined. Economic research and education still have a long way to go,” Mr. Zhou said at the time.

Zhou Xiaochuan, then-governor of the People’s Bank of China, in Beijing, on March 12, 2015. Feng Li/Getty Images

This reflected more discussion and reflection among the so-called elite class in China following the outbreak of the U.S.-China trade war. Some had realized that China was still not a match for the United States, said Yang Dali, a political science professor at the University of Chicago.

Mr. Zhou served as the governor of the People’s Bank of China from 2002 to 2018, a tenure of 16 years spanning the administrations of former CCP leaders Jiang Zemin, Hu Jintao, and current leader Xi Jinping. In 2013, despite reaching the retirement age of 65, he was reappointed as the governor of the bank, breaking the convention that no more than two terms can be served.

The destructive power of the current real estate crash in China is impacting the country’s economy, politics, and society in various ways, reaching a critical point of crisis.

Mr. Zhou is one of the most authoritative figures in China’s financial system. His call for policymakers to learn from Japan at this time may be seen as him foreseeing a far more challenging crisis looming beneath the surface.