Study on the real interest rate in China after the inclusion of the housing price factor in the CPI
A study published in PLOS ONE by Ding et al (2023) examined the real interest rate in China after the inclusion of the housing price factor in the Consumer Price Index (CPI). The study aimed to update the calculation of China's real interest rate and provide a reference for academic research and policy formulation.
Background
The Chinese economy has undergone a long-term transition reform, but there is still a planned economy characteristic in the financial sector, which is financial repression. Due to the existence of financial repression, China's actual interest rate level should be lower than the CPI. However, based on China's official interest rates and the CPI, we calculate that China's actual interest rate will be higher than the CPI in more than half of the years from 1999 to 2022. This is inconsistent with the financial repression that exists in China, and the main reason is the way China's CPI is calculated. China's CPI measurement system originated from the planned economy era, which did not fully take into account the rise in housing purchase prices, so the current CPI measurement system can be more realistic by taking into account the rise in housing prices.
Methodology
The core idea of this study is to mine relevant official statistical data and calculate the proportion of Chinese residents' expenditure on house purchase in their total expenditure. By taking the proportion of house purchases as the weight of the house price factor and the proportion of other consumption as the weight of the official CPI, the Generalised Consumer Price Index (GCPI) is formulated. The GCPI is then compared with market interest rates to determine the actual interest rate situation in China over the past 20 years.
Results
This study has found that, using the GCPI as a measure, China's real interest rates have been negative in most years since 1999.
Conclusion
The study concludes that by including housing prices in the CPI, it updates the calculation of China's real interest rates and provides a reference for academic research and policy formulation. The study also suggests that further research is needed to explore other factors that may affect China's real interest rates.