China’s Unconventional Strategy to Combat Property Market Deflation: A Bold Move to Stabilize the Economy

China's ongoing battle against the deflationary pressures in its overstretched real estate market is taking an unconventional turn. Historically, the central government has relied on regional authorities to offload bad debts and distribute financial risks. Now, in a surprising development, local governments might be tasked with purchasing unsold homes to alleviate downward pressure on property prices.

This strategy is seen as a protective measure for banks burdened by non-performing loans and the declining value of mortgage-backed properties. According to a Bloomberg report, China is considering allowing local governments to use funds from special bonds—previously reserved for infrastructure and environmental projects—to buy up these surplus homes.

However, with more than half of this year's 3.9 trillion yuan bond issuance quota already spent, it remains uncertain how much will be allocated for this housing market intervention if the proposal is approved.

What we are witnessing here is the twitching of the keynesian fiat money system, believing that interest rates can be manipulated to control aggregate demand, that initial prices can be manipulated at will and that the behavior of economic agents can be manipulated. This is evidence of the infantile basic principles of keynesian economies, which ultimately always collapse under the lack of a market mechanism to clean up the mess initiated by the central planners. (We do not blink toward Brussels, do we?)

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