Article

Urban Studies
2016, Vol. 53(16) 3493–3509
Ó Urban Studies Journal Limited 2015
Rising residential rents in Chinese Reprints and permissions:
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mega cities: The role of monetary DOI: 10.1177/0042098015613753
usj.sagepub.com
policy

Shu-hen Chiang
Chung-Yuan Christian University, Taiwan

Abstract
Although there have been a large number of studies carried out on fluctuations in housing prices,
little is known about what causes changes in residential rents, which are inextricably intertwined
with urban living standards. This is especially noteworthy in Chinese cities, which are now being
challenged by the housing market frenzies. Shift-share analysis is proposed to evaluate all possible
triggers of residential rent inflation in three cities during the 2001–2013 period, which covers
two distinct monetary policy regimes in China. It is found that the recent rise in residential rent
comes as a result of aggregate inflation associated with an expansionary monetary policy since
the 2008 Global Financial Crisis and an all-encompassing and stable policy stance should therefore
be adopted.

Keywords
inflation, monetary policy, residential rent, shift-share analysis

Received September 2013; accepted September 2015

Introduction serious residential rent inflation will eventu-

The very rapid increase in housing prices in
Chinese cities (Chiang, 2014) is recently
becoming an increasingly difficult problem
that has further rippled out to the urban
residential rental market. Taking Beijing as
an example, residential rents have increased
by 30% since 2001, while the overall infla-
tion rate has risen by only 18% during the
same period. Moreover, it is well-known
that the inhabitants of large cities frequently
face higher costs of living, especially for their
residential needs. Thus, it is the responsibil-
ity of government to ensure the right of
abode by alleviating the burden of high resi-
dential rent. One cannot help but worry that
ally harm the quality of life and develop-
ment in urban China.
In particular, the trend toward globalisa-
tion, in conjunction with the Global
Financial Crisis (GFC) initiated by the sub-
prime lending crisis in the USA, which
threatened the collapse of the banking sys-
tem and triggered economic recessions, has
also affected nations worldwide. The newly
developing China was no exception. To
Corresponding author:
Shu-hen Chiang, Chung-Yuan Christian University, Finance,
No. 200, Chung-pei Road, Chung-li city, Taoyuan County,
Chung-li, 320, Taiwan.
Email: shchiang@cycu.edu.tw

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3494
avoid sinking into economic downturn, in
2008, the Chinese government immediately
altered its monetary policy from a conserva-
tive stance to a progressive attitude by means
of abruptly increasing the money supply and
greatly relaxing credit conditions. Our main
concern here is whether or not such an
expansionary monetary policy has acted to
stimulate the growth in residential rents.
Compared with rising housing prices which
often provide the incentive for investment
and increased living standards, residential
rents are more inclined to the individual’s
right to live and to a government’s public
policy. In fact, numerous attempts have been
made to stabilise housing prices in China
(Chen et al., 2011; Hui and Yue, 2006;
Zhang, 2013; Zhang et al., 2012). What
seems to be lacking, however, is an investiga-
tion into the sources of the rapid increases in
urban residential rents. At the same time, as
found in many studies on the burst of the
housing bubble, housing price dynamics are
fundamentally reliant on the price-rent ratio
(Chen, 1996) so a better understanding of
the status of residential rents is very useful
when seeking to analyse the housing mar-
ket.1 Finally, according to the consumer
price index (CPI), residential rents are
directly related to inflation and hence it is
natural to be applied to evaluate of the mer-
its of monetary policy in relation to the
housing market. For the reasons mentioned
above, the focus of this paper is on residen-
tial rents in China.
Clearly, the residential rent deserves
explicit emphasis, for which we must try to
identify its causes and consequences. Urban
residential rent inflation may be affected by
various external and internal factors. The
former includes national, residential and
urban causes and the latter is the rent-
market bubble. This leads us to the question
as to whether a model can consider all possi-
ble causes of residential rent inflation simul-
taneously. Fortunately, shift-share (SS)
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Urban Studies 53(16)
analysis provides a unified structure to cap-
ture the varied sources of residential rent
inflation. We believe that only when the
sources of urban residential rent inflation
are evaluated correctly can the authorities
respond with an appropriate policy that will
contribute to a reduction in the high degree
of inflationary pressure on the rental issue
of urban residences.
Using data for three important Chinese
mega cities, namely, Beijing, Shanghai and
Tianjin in the coastal region, it is found that
in the pre-crisis period, localised rent-market
frenzies were the most important factor in
explaining fluctuations in residential rents,
while national inflation, which is induced by
a proactive monetary policy, best accounts
for the more recent soaring residential rents
since 2008. In other words, the Chinese resi-
dential rent inflation problem is connected
to an excess money supply in the post-GFC
period. A more stable monetary policy can
therefore be considered by the authorities in
order to turn the tide of continuously
increasing residential rents.
Overview of residential rent
inflation and shift-share analysis
A persistently rising price level is referred to
as inflation. By analogy, the upward growth
tendency of urban residential rent is here
referred to as residential rent inflation.
Reviewing related theories of inflation can
offer the key reasons for rising residential
rents in China. In fact, inflation is one of the
most important topics in economics, espe-
cially in macroeconomics. A notable exam-
ple is the quantity theory of money to state
that printing more money eventually leads
to higher inflation. In other words, the
money supply growth will lead to rising
prices synchronously. Inflation thus pro-
ceeds from top to bottom quickly and homo-
geneously on the basis of a freely flexible
price adjustment assumption. As Milton
Chiang
Friedman remarked, inflation is not only a
monetary phenomenon, but is also a pure
macroeconomic variable. Hasan (1999),
Siklos and Zhang (2010) and Zhang (2011)
all supported the quantity theory of money
in relation to China. From this viewpoint,
correlation between inflation and rising
housing prices must be positive (Anari and
Kolari, 2002). Based on data from 15 indus-
trialised countries, Roffia and Zaghini
(2007) suggested that the significantly posi-
tive influence of excess money growth on
housing prices must consider another condi-
tion: a loose credit environment. Similarly,
Zhang et al. (2012) and Zhang (2013) both
emphasised that exorbitantly high housing
prices in China are mainly driven by an
expansionary monetary policy, including
large increases in the money supply and a
credit boom. Based on the above, residential
rent inflation can link national inflation
associated with money supply. In summary,
when a flexible price adjustment mechanism
is valid, an expansionary monetary policy,
namely, money supply growth is the only
source of all kinds of inflation, including
residential rent inflation, converging toward
national inflation.
From a Keynesian point of view, price
rigidities are extended to inflation dynamics
in the microeconomic model. Specifically,
the New Keynesian theory (NKT) (Clarida
et al., 1999; Gali and Gertler, 1999) stresses
the role of the incomplete adjustment of the
price mechanism in giving rise to external or
money shocks, especially due to sector het-
erogeneity. Thus, inflation, which is attrib-
uted to a sectoral factor, is referred to as
sectoral inflation (Bihab and Matheron,
2012). Imbs et al. (2005) described sectoral
inflation vividly in a few words: ‘it is hard to
think of reasons why clothes and vegetables
should revert to parity at the same speed’.
Many studies (Altissimo et al., 2009; Aoki
2001; Gali, 1993; Leith and Malley, 2007)
have shown that the degree of sectoral price
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3495
stickiness is critical to understanding the
inflation process and the effectiveness of
monetary policy. As far as residential rent
inflation is concerned, Genesove (2003),
Hoffman and Kurz-Kim (2006) and Shimizu
et al. (2010) all paid attention to the price
stickiness of housing rents in the USA,
Germany and Japan, respectively, on the
grounds that housing rent adjustments are
far stickier than those of other goods and
services. Aysoy et al. (2014) not only showed
that the adjustment speed of housing rent
was relatively low, but they also revealed
that search and moving costs are the main
reasons for housing rent stickiness.
Apart from the sectoral factor, another
possible reason for the imperfect price
adjustment may be the regional dimension
arising from distinct cultural, institutional
and socio-economic structures. As pointed
out by Mehrotra et al. (2010), ‘aggregate fig-
ures mask significant differences in economic
performance and different degrees of market
development across regions’. Clark (1984)
argued that inflation can differ on the city
level, as opposed to spatial price integration.
Cecchetti et al. (2002) observed a very low
rate of price convergence among US cities.
Coen et al. (1999) and Hassler and Neugart
(2003) estimated Phillips curves for the USA
and Germany at local levels because of
regional heterogeneity. More recently, Beck
et al. (2009) and Nagayasu (2011) both eval-
uated the speed and procedure of inflation-
ary convergence at the regional level in the
EU. These findings make it clear that urban
residential rent inflation may find its roots in
sectoral and regional elements.
Finally, after all external fundamental
factors (national, sectoral and local) are
explained, what is the remaining cause of
urban residential rent inflation? An illustra-
tion from the rational bubbles theory may
provide additional information. The bubbles
are defined by their variability from exogen-
ous fundamentals (Black et al., 2006). In
3496
other words, the housing price can be
divided into two elements: the fundamental
and the bubble (Nneji et al., 2013; Tsai,
2014). The former can be explained by exter-
nal economic variables and the latter (the
unexplained part and self-related behaviour)
is regarded as irrational. This concept and
approach can reasonably be applied to
explain urban residential rent inflation. As
long as the unexplained part is far more
important than the fundamental factors, the
authorities must lay special emphasis on
urban residential rent inflation due to the
emergence of irrational rent inflation.
As mentioned above, inflation can be
caused by aggregate, sectoral and regional
factors associated with local rent bubbles.
The various arguments on which the differ-
ent sources of inflation depend are shown in
Table 1. First, macroeconomics tells us that
the money supply growth can propagate
inflation, from national level to the disaggre-
gated level instantly. Second, according to
the NKT, structural elements such as sec-
toral and local differences can affect the
magnitude and process of urban residential
rent inflation. Finally, rational bubble the-
ory suggests that the residual reveals a possi-
ble rent-market bubble, which gives rise to
urban residential rent inflation. In summary,
in terms of macroeconomic theory, mone-
tary policy and national inflation are critical
to urban residential rent inflation. In con-
trast, we find that it is structural factors or
the rent-market bubble, rather than mone-
tary policy that can affect urban residential
rent inflation.
Table 1. Sources of inflation.
Types Sources
National inflation Monetary policy stance
Sectoral and regional Sectoral and regional
inflation differences
Localized bubbles Irrational exuberance
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Urban Studies 53(16)
Past studies on inflation have often been
based on a specific viewpoint, especially
from the macroeconomic inflationary per-
spective. However, it is necessary to consider
all probabilities together when discussing the
sources of urban residential rent inflation.
More importantly, one must also consider
the uniquely Chinese phenomenon using the
urban-biased policy as an economic stimulus
(Yang, 1999). Thus, inflation in the urban
residential sector cannot be overlooked
when discussing Chinese inflation. The cre-
ation of a unified framework to identify the
different sources of residential rent inflation
has become a key question and the answer
to which can be ascertained through SS
analysis from regional science.
SS analysis involves the decomposition of
local economic change into three separate
effects, namely, the national growth effect
(NE), industrial mix effect (IM) and compet-
itive effect (CE). Coulson (1993) further
divided CE into two factors: the regional
effect (RE) and the local specialisation effect
(SE). In recent years there has been a
renewal of interest in the applicability of SS
analysis. Dinc and Haynes (1999) applied SS
analysis, data envelopment analysis and the
input-output model to examine regional
inefficiency. Gaschet (2002) used SS analysis
to consider the suburbanisation question.
Mulligan and Molin (2004) designed a two-
category SS model to estimate the relation-
ship between population and employment of
the suburbs. Chiang (2012) made use of SS
analysis to decompose metropolitan unem-
ployment into cyclical, sectoral, local and
Adjustment mechanism Theory
Freely flexible Macroeconomic and
Monetarism views
Sectoral and regional New Keynesian view
frictions
Explosive increase Rational bubble theory
Chiang 3497

Table 2. Basic environments in three mega cities (2012).

Population (millions) Area (km2) Density RGP (billions CNY) RGP per capita ($)

Beijing 17.55 16,411 1069 1780 13,797 (2)

Tianjin 12.28 11,920 1044 1288 14,750 (1)
Shanghai 19.21 6340 3030 2010 13,471 (3)

Note: The numbers in the parentheses stand for the rank in RGPs (regional gross products) per capita.
Source: National Bureau of Statistics (NBS).

frictional parts. As mentioned above, SS provided for the different effects to facilitate
analysis has been widely used in many fields, further policy implications. Then, an econo-
but it is first introduced to investigate urban metric method is set up to evaluate the rela-
residential inflation. tive importance of the different sources of
Finally, we must constantly bear in mind urban residential rent inflation.
that SS analysis is composed of two parts:
internal and external factors. If the external
causes (the ‘share’ part) cannot totally
SS analysis with residential rent inflation
account for urban residential rent inflation, At the outset, SS analysis in the context of
then the remaining (the ‘shift’ part) intuitively the price level may be formulated as follows:
points to its own factor. This structure is in  
complete agreement with the above concept DP DPj DP
DPij = Pij 3 + Pij 3 
for residential rent inflation for which the P Pj P
 
three external factors (national, sectoral, local DPi DP
causes) correspond to the fundamentals, with + Pij 3  + Pij ð1Þ
Pi P
an internal element that corresponds to the  
DPij DPi DPj DP
irrational bubble. Thus, SS analysis can be 3   + ,
Pij Pi Pj P
used as a useful tool for examining residential
rent inflation in urban China.
where sector j is the residential sector;
To sum up, the aim of this paper is to
Pij , Pi , Pj and P represent the price level of the
establish the SS formulation to decompose
residential sector in urban region i, the urban
urban residential rent inflation into national,
price level, the price level of the residential
residential, urban and localised rent-bubble
sector and the national price level, respec-
effects, respectively, and then to estimate
tively. It is clear that (1) is a mathematical
their relative significance. Since these four
identity derived by decomposing the price
categories of inflation can give rise to their
index into four portions, namely, macroeco-
own policy implications, seeking the sources
nomic, residential, urban and locally residen-
of residential rent inflation must be a valued
tial price factors. This identity may be
step in solving rising residential rent troubles
simultaneously divided by Pij to generate an
in Chinese mega cities.
inflation-version of the SS analysis due to
inflation (I) being equal to the growth rate of
Theoretical structure and the price level, namely, I = DP P as follows:
econometric method  
Iij = I + Ij  I + ðIi  IÞ
In this section, SS analysis is used to decom-     ð2Þ
pose residential rent inflation into four com- + Iij  Ii  Ij  I ,
ponents. Later, some economic meanings are

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3498
Analogously, Iij , Ii , Ij and I represent the
inflation of the residential sector in urban
region i, urban inflation, residential rent
inflation and national inflation, respectively.
From (2), it can be seen that the residential
rent inflation in a city may first be affected
by national inflation, which is caused by an
active monetary policy. This portion is
referred to as the national effect (NE). It is
very reasonable that a higher national infla-
tion rate based on monetary policy can push
up any kind of inflation including residential
rent inflation. Next, higher inflation in the
residential sector compared with national
inflation can be attributed to the residential
effect (RE). The urban effect (UE) indicates
that the difference between the urban and
national inflation can be exactly used to
compute the magnitude of the inflation
caused by urban factors. A positive UE, for
example, implies that higher inflation in the
urban economy than at the national level is
the result of urban-specific inflation. It is
very interesting to note that the NE corre-
sponding to national inflation can serve as
an index of the attitude toward the monetary
policy. RE and UE are both regarded as
sources of structural inflation to reflect
structural types of price rigidities. To sum
up, SS analysis gives economic reasons based
on national, residential and urban dimen-
sions for urban residential rent inflation.
Finally, we can easily identify the remain-
der, after all external elements, including
national, residential and urban causes of resi-
dential rent inflation in a region have been
deleted as in (3), by adding and subtracting
national inflation. This part is referred to as
the ‘local frenzied effect’ (LFE) to manifest
the current situation in the urban rent fren-
zies. This is because, after an unprecedented
rise in the urban residential rent market, resi-
dential rent will continue to increase more
and more. This over-confidence results in
overly high rent inflation and hence no other
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Urban Studies 53(16)
economic variables can explain urban residen-
tial rent inflation better than the spread of the
over-confident psychology. The LFE index is
used to evaluate the magnitude of urban resi-
dential rent bubbles or frenzies as follows:
   
LFE = Iij  ðIi  I Þ  Ij  I  I
  ð3Þ
= Iij  UE  RE  NE ,
From the above, we come to the conclu-
sion that the four effects derived from SS
analysis can fully express all the sources of
residential rent inflation as formulated in (4)
below. Combining the four sources of infla-
tion under the SS framework can provide us
with a better understanding of the residential
rent inflation issue in urban China.
 
Iij = I + Ij  I + ðIi  IÞ
   
+ Iij  Ii  Ij  I ð4Þ
= NE + RE + UE + LFE,
The SVAR model
When we want to examine the relative
importance of all possible causes of urban
residential rent inflation, we need to use an
adequate time-series econometric model, in
this case, the structural vector autoregres-
sion (SVAR) model. In fact, SVAR methods
are commonly used in many macroeconomic
studies (Bernanke, 1986; Blanchard and
Katz, 1992). Coulson (1993) introduced
SVAR to estimate the sources of metropoli-
tan employment fluctuations based on SS
analysis. Later, Coulson and Rushen (1995)
extended this approach to evaluate the role
of a dominant industry in the local econ-
omy. Clark (1998), Carlino and DeFina
(1998, 1999), Coulson (1999) and Carlino
et al. (2001) further explored the sectoral
sources of regional employment growth.
SS analysis uses four kinds of inflation to
represent the sources of urban residential
rent inflation as in (4). The VAR approach
Chiang 3499

can be utilised to express the four inflation have specified values, so they are not zero.
variables as in (5) or in matrix form as in Since these restrictions all appear at time t,
(6): they are therefore referred to as ‘contem-
2 3 2 3 2 3 poraneous’ restrictions, which are utilised in
I I e1 the SS analysis. The following serves as an
6 Ij 7 6 Ij 7 6 e2 7 example. First, national inflation is the
6 7 = A(L) 3 6 7 + 6 7 , ð5Þ
4 Ii 5 4 Ii 5 4 e3 5 result of a macro-shock as NE $ I . Second,
Iij t Iij t1 e4 t residential inflation is caused by residential-
rent-sector
 and
 national shocks such as
It = A(L) 3 It1 + et , ð6Þ RE $ Ij  I . Moreover, urban inflation
where A(L) is a 4 3 4 matrix of lag polyno- depends on both national and urban shocks
mials (L); and e represents the reduced-form because UE $ ðIi  I Þ. Finally, urban rent
innovation. The VAR approach consists of bubbles hinge on the simultaneous occur-
current variables (outcomes) and previous rence of national, residential, urban and
variables (causes) but it has been criticised local residential
  rent factors because
as being devoid of any economic content. LFE $ Iij  Ii  Ij  I . It follows that
In the case of the SVAR model, the the contemporaneous restrictions can totally
restrictions of a particular economic model correspond to the SS formulation as in (4).
are imposed on the contemporaneous rela- However, the central issue of the struc-
tionships among the variables using a priori tural model is how to resolve the corre-
information from the economic analysis. sponding relationship between the structural
and reduced forms, namely, the problem of
Based on the SS analysis in (4), the contem-
identification. For analytic convenience, (9)
poraneous restrictions (W) among the differ-
can first be obtained from (8) by pre-
ent inflation variables are shown in
multiplying by W1 :
structural form as in (7) or in matrix form as
in (8):
It = W1 3 B(L) 3 It1 + W1 3 et : ð9Þ
2 32 3
1 0 0 0 I It is easy to find that (9) equals (6) as
6 1 1 0 0 76 I 7 et = W1 et in (10):
6 76 j 7
6 76 7
4 1 0 1 0 5 4 Ii 5 2 3
e1 2 31 2 e 3
1 0 0 0 1
1 1 1 1 Iij t 6 e2 7
2 3 2 3 7Þ 6 7 =6 1 1 0 0 7 6 e 7
6 27 ,:
I e1 4 e3 5 4 5 4
1 0 1 0 e3 5
6I 7 6e 7 e4 t 1 1 1 1 e4 t
6 j7 6 27
= B(L) 3 6 7 + 6 7 ,
4 Ii 5 4 e3 5 ð10Þ
Iij t1 e4 t
Although the restrictions in W can identify
W 3 It = B(L) 3 It1 + et ð8Þ the relationship between the structural and
reduced-form innovations, W, which refers
where e is the structural innovation. In other to the one-on-one unit responses of the
words, traditional VAR assumes that the reduced-form equations to the structural
off-diagonal components are all restricted to innovations is highly parameterised and
zero, while SVAR applies the contempora- over-restricted. Thus, a new matrix, W1 ,
neous restrictions to recommend economic where the diagonal elements are relaxed to
theory to set up some new restrictions to allow a non-unitary relationship as in (11),
ensure that the off-diagonal components is a generalisation of W. This new-version

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3500 Urban Studies 53(16)

Figure 1. Three mega cities and three regions. Bold lines are regional borders and thin lines are provincial
borders. Moreover, three shaded areas correspond to three mega cities and 31 provincial units include
Beijing, Tianjin and Shanghai.

Table 3. Descriptive statistics of residential inflation (%).

IN IN8 IBE IBE8 ITJ ITJ8 ISH ISH8

Mean 0.20 0.24 0.13 0.20 0.17 0.28 0.17 0.18

Median 0.20 0.30 0.20 0.10 0.10 0.21 0.13 0.14
Maximum 2.60 1.80 1.80 4.40 2.50 5.54 2.66 1.60
Minimum 21.30 22.00 22.80 25.40 21.73 24.30 21.95 22.80
Std. dev. 0.65 0.50 0.71 0.98 0.78 0.82 0.68 0.47

model here is used to evaluate the sources of Data description and unit root
urban residential inflation in China. tests
2 3 Residential rent data from CPI for the three
1 0 0 0
6 v21 1 0 0 7 mega cities are used to understand the
W1 = 4 , ð11Þ
v31 0 1 0 5 sources of rising housing rents in China. In
v41 v42 v43 1 addition, since SVAR must be implemented

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Chiang
Figure 2. National and three-city price levels during 2001–2013.
under a system of stable variables, unit root
tests are applied to determine whether the
variables are marked by stationarity.
Data description
Beijing (BE), Shanghai (SH) and Tianjin
(TJ) in China (N) are all located in coastal
regions as the core of the Chinese economy;
see Figure 1. At the same time, they are all
under the direct administration of the central
government. As shown in Table 2, the popu-
lation of these mega cities all exceeds the
threshold of 10 million inhabitants with the
three highest regional gross products (RGPs)
per capita in all regions of China. Their eco-
nomic competitive abilities over other
regions in China are simply related to the
government’s urban-biased policies which
include the investment of huge amounts of
social resources into these cities as growth
poles that allow China to catch up with the
developed economies. Given their dominant
positions in the overall economy, housing
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3501
booms in these mega cities must generate
far-reaching effects in other regions and
eventually lead to full-scale residential rent
inflation (Chiang, 2014). The significance of
residential rents in these three mega cities
cannot therefore be overemphasised.
The CPI, which is generally used to moni-
tor changes in the cost of living, is composed
of eight subcomponents, namely, transporta-
tion and communications, tobacco and
liquor, clothing, food, home appliances and
services, medical care, entertainment, educa-
tion and culture as well as residence to
assign number eight. More than 600 items
were selected from monthly household sur-
veys to calculate the CPI, which can be fur-
ther divided into urban and rural indices for
the 80 counties and 146 cities included under
Chinese dualistic system. In this study, infor-
mation on residential rents in these three
mega cities was collected from the National
Bureau of Statistics (NBS) for the period
from 2001 to 2013, with a total of 150
monthly observations in the base period, i.e.
3502
Figure 3. National and three-city residential price levels during 2001–2013.
January 2001, using the back-stepping
method. A similar survey and computational
approach for calculation of the residential
rent from the CPI has been seen in other
studies (Crone et al., 2010; Deng et al., 2003;
Diewert et al., 2009; Shimizu et al., 2010;
Verbrugge and Poole, 2010).
Figure 2 shows a clear and continuous
increase in the national and three-city CPIs.
However, as can be seen in Figure 3, the
trends in residential rents are totally different
from the overall CPIs, with Tianjin posses-
sing the largest change in residential rent
among the three cities. Since there are very
different evolutionary trends in residential
rent levels from the three mega cities, it is
necessary to elaborate on the residential rent
indices for the different cities, separately.
The overall price and residential rent indices
are used to compute the inflation rates and
the related descriptive statistics, which are
shown in Table 3. From this table, it is found
that the order of the inflation rates for the
residential sector is Tianjin, Shanghai and
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Urban Studies 53(16)
Beijing, respectively. Even more noteworthy
is that the urban residential rent inflation is
always higher than the overall inflation rate
and hence more weight should be attached
to it.
Finally, it is important to note the influ-
ence of the GFC on urban residential rent in
China. The GFC compelled the Chinese gov-
ernment to implement an expansionary mon-
etary policy in 2008 to avoid an economic
slowdown. Since inflation is characterised by
money growth, this new monetary policy
stance should have a huge impact on urban
residential rent, which is fully reflected in
Figure 3, showing structural changes result-
ing from the overall CPIs which occurred in
2008. Moreover, this is especially noticeable
in the case of residential rent, where there is
apparent evidence to show the transition of
the urban residential rents in Figure 2. Based
on the investigation results, econometric test-
ing divides the monetary policy regimes into
a stable period and an expansionary period
which is used in evaluating the differences in
Chiang 3503

79 (2008/07)
the sources of residential rent inflation in

20.191***

20.012***
(25.856)

(24.230)
section ‘Unit root tests’.

0.000**
(2.000)
8

Note: *, ** and *** are statistically significant at the 10%, 5% and 1% critical values, respectively based on the testing framework by Zivot and Andrews (1992).
79 (2008/07) Unit root tests
(26.6149) Most economic variables with I(1), namely,
20.260***

20.007**
(22.856)

(21.302)
a unit root, will make all of the estimation
Shanghai

20.000
results unreliable. The Augmented Dickey-
Total

Fuller (ADF) test is the most popular

8 method used to deal with this problem.
However, as noted in section ‘Data descrip-
81 (2008/09)

tion’, structural change resulting from resi-

20.171***

20.014***
(25.498)

(23.816)

dential rent inflation may have occurred

0.0001*
(1.825)

because of the 2008 GFC. Perron (1989)

argued that if structural change actually
8

takes place, the power of rejection in a unit

root will apparently be reduced. Thus, we
82 (2008/10)
20.255***

20.011***

need an adequate unit root test to consider

(24.929)

(23.259)

(0.015)

the issue of structural change. Perron (1989)

Tianjin

0.000
Total

proposed an alternative unit root test with

5

an ‘exogenous’ structural break. Zivot and

Andrews (1992) further treated a structural
80 (2008/08)

break as being endogenously determined by

20.6541***

20.022***
(28.425)

(24.327)

the data with two models: model A which

0.001***
(3.731)

allows for a structural break in the intercept

of the trend function as in (12); and model C
8

which allows for a structural break in the

intercept and slope in (13). The null hypoth-
81 (2008/09)
Table 4. Zivot-Andrews test on residential inflation data.

esis in (12) and (13) is that a = 0, which

20.226***

20.007**
(25.844)

(22.797)

implies that there is a unit root in a variable

(0.575)
0.0000
Beijing
Total

y; the alternative hypothesis is that there is a

3

stationary break point. DU is an indicator

as a dummy variable for a mean shift at a
specific time, while DT is the corresponding
79 (2008/07)
20.127***

20.008***

trend dummy variable. Model C is more

(25.441)

(23.578)

(0.127)
0.0000

generalised than model A, so we choose

model C to show the outcomes of the unit
8

root test with a structural break for residen-

tial rent inflation, as shown in Table 4.
78 (2008/06)

(21.5119)
20.195***

20.006**
(25.538)

(21.006)

Dyt = c + ayt1 + bt + uDUt

Nation

0.0001
Total

X
k
ð12Þ
+ dj Dytj + et ,
8

j=1
TP

lag
a

g
u

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3504 Urban Studies 53(16)

Table 5. Variance decomposition of residential inflation in the stable period (%).

12 month 24 months
NE RE UE LFE NE RE UE LFE

Beijing 21.525 9.904 5.447 63.124 7.249 49.793 3.889 39.070

Shanghai 13.954 42.913 11.014 32.119 14.443 43.474 11.073 31.010
Tianjin 19.407 13.788 7.493 59.312 32.434 9.847 9.807 47.913
average 18.295 22.202 7.985 51.518 18.042 34.371 8.256 39.331

Table 6. Variance decomposition of residential inflation in the expansionary period (%).

12 month 24 months
NE RE UE LFE NE RE UE LFE

Beijing 22.449 7.315 61.006 9.230 19.176 5.9222 58.143 16.759

Shanghai 55.992 8.077 5.281 30.650 65.822 8.063 6.386 19.729
Tianjin 59.061 16.671 4.342 19.926 50.224 13.622 15.910 20.245
average 45.834 10.688 23.543 19.935 45.074 9.202 26.813 18.911

Dyt = c + ayt1 + bt + uDUt + gDTt
X
k cities based on the outcomes of the SVAR
+ dj Dytj + et ,
j=1
There are some important outcomes from
Table 4. First, all residential rent inflation
variables are stable and this result can there-
fore ensure that our SVAR with its limita-
tion in terms of stable variables is available
to estimate the sources of urban residential
rent inflation. Next, it is revealed that the
time points of the structural break from June
2008 to October 2008 just correspond to the
GFC interval. Finally, we choose June 2008
as the turning point based on national infla-
tion, which is a good proxy for initiation of
the monetary policy.
Estimation results and policy
considerations
This section first discusses the relative
importance of NE, RE, UE and LFE to
residential rent inflation in the three mega
ð13Þ estimation followed by the variance decom-
positions (VDs) in the stable period versus
the expansionary period. This is because the
VDs can be used to evaluate the relative con-
tribution of different sources of urban resi-
dential rent inflation. In turn, we then draw
conclusions from these findings regarding
the residential rent inflation problems.
General analysis of residential rent inflation
The result of a series of measures to commer-
cialise the urban housing market in the 1980s
in China led to privatisation and ultimately
the transformation of a public-sector-
dominated housing system into a market-
based housing system beginning in 1998
(Chen et al., 2011). Moreover, as voiced in
the old Chinese saying: ‘Where there is soil,
there is wealth’, the rapid pace of economic
development and the speedy accumulation
of wealth gave rise to many who channeled

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Chiang
huge amounts of capital into the urban real
estate sector to boost the demand for
housing.
The housing boom was still evident even
during the period of a relatively stable
money market (January 2001–June 2008);
see Table 5 for either 12 or 24 month peri-
ods. This is because RE and LFE, which
both belong to the residential sector itself,
on average account for more than 70% of
the explanatory ability of urban residential
rent inflation. In particular, the most impor-
tant factor is LFE, representative of the
degree of localised rent frenzies, which are
behind the unreasonable residential rent
inflation that has prevailed in these cities,
especially the twin cities of Beijing and
Tianjin. Building a more competitive and
transparent housing rent environment is
essential to urban management. National
inflation, which is driven by money growth,
is thus not the main cause of the first-wave
residential rent inflation.
During the nightmare of the 2008 GFC,
the Chinese government actively implemen-
ted a number of monetary policy measures,
which resulted in the rapid growth of the
money supply and a loosening of the credit
conditions which was thought to be neces-
sary to fight the subsequent global economic
depression. Another SVAR model is esti-
mated to compare the sources of urban resi-
dential rent inflation before and after the
GFC in accordance with a turning point in
June 2008. Just as forecasted by many econ-
omists, this expansionary monetary policy
was accompanied by a housing rent explo-
sion; see Table 6.
In other words, the most important factor
influencing the rise in urban residential rent
stems from national inflation, regardless of
whether a 12- or 24-month period is consid-
ered. The second most important factor is the
urban effect (UE). These outcomes seem to
suggest that urban residential rent inflation is
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3505
linked to overall inflation at both the national
and local levels, rather than the residential
sector itself. This outcome is very different
from the one in the stable period. LFE, which
represents the magnitude of the residential
rent bubbles, only accounts for less than 20%
of the explanatory power. Similarly, RE is
the smallest element of residential rent infla-
tion. All these items make it clear that the
causes of residential rent mainly stem from
national inflation, which is induced by an
expansionary monetary policy. From this, it
can be inferred that an expansionary mone-
tary policy brings about the economic recov-
ery at the expense of high inflation and a
heated urban housing rental market.
Residential rent inflation in the three mega
cities
For the three mega cities, there are different
sources of residential rent inflation in the
two periods. In the stable period (2001–
2008), LFE reaches about 60% of the expla-
natory power of urban residential rent
inflation in two of three mega cities, while it
only accounts for 32% of the explanatory
ability in Shanghai (12 months). It is clear
that the housing bubble mainly points to
Beijing and Tianjin. However, for the 24-
month period, LFE is partly replaced by RE
or NE. This result should be reasonable on
the grounds that the bubble question should
be revised through more information in the
long run.
In the expansionary period (2008–2013),
national inflation is the main cause of resi-
dential rent inflation in both Shanghai and
Tianjin, while local inflation is critical to
residential rent inflation in Beijing. It is obvi-
ous that the occurrence of inter-urban het-
erogeneity is particularly noticeable in this
three-city research study. At the same time,
Beijing’s government should devote more
attention to the issue of urban inflation.
3506
Policy implications
To conclude, the source of residential rent
inflation in the first and second periods
mainly comes from LFE and NE, respec-
tively. In other words, the rising residential
rent is characterised by irrational rent fren-
zies or bubbles prior to the GFC. However,
the reason for the residential rent inflation
in the post-crisis period shifts to national
inflation, which is caused by the expansion-
ary monetary policy. Based on the above,
one solution to the housing rent debate is to
attach more importance to the merits of an
expansionary monetary policy: economic
growth or housing rent hot spots. Perhaps a
relatively stable monetary policy is a work-
able approach when we care more about
releasing the pressure of high urban residen-
tial rent inflation.
In addition, we further wonder whether
our findings that monetary policy mainly
leads to rising residential rent inflation in
these three cities could happen in other cities.
Although other cities have not been explored
into relationship between monetary policy
and urban residential rents because of the
lack of sufficient data, it is generally believed
that monetary policy can affect regions in an
all-round manner, even some studies empha-
sised that monetary policy has differential
regional effects across (Carlino and DeFina,
1998, 1999).2 Thus, monetary policy not only
results in rising residential rents in these
three cities but also generates similar influ-
ences in other cities. Furthermore, the stud-
ies regarding spillovers of regional outputs
(Brun et al., 2002; Chen and Partridge, 2013)
and ripple effects of regional housing prices
(Alexander and Barrow, 1994; Chiang, 2014;
Luo et al., 2007; Stevenson, 2004) all reveals
that there is a significant dissemination from
the central regions (cities) to other regions
(cities). For reasons mentioned above, we
cannot help worrying that our estimation
results in these three cities possibly repeat
the same experiences in other cities. If this
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Urban Studies 53(16)
argument is valid, an actively expansionary
monetary policy may eventually cause over-
all urban rent inflation in China and the role
of monetary policy must be re-evaluated
now seriously.
Alternatively, if an active monetary pol-
icy is necessary for economic growth in
China, we must seriously consider and
examine the transmission mechanism of the
monetary policy, especially in relation to the
bank lending channel, where monetary pol-
icy is implemented through the process of
moving capital from the banking system to a
market economy. However, in the case of
the bank lending channel, credit rationing is
always a question (Stiglitz and Weiss, 1981)
given the fact that banks with imperfect
information will allocate most of their capi-
tal resources to corresponding customers,
for example, to the rich. Thus, when credit
rationing is widely applied, financial capital
is concentrated with the high-income indi-
viduals. For the rich with huge financial
resources, real estate becomes the priority
investment. The outcome is that an expan-
sionary monetary policy eventually spurs an
overheated housing market. If this thinking
is correct, how to alter the transmission
channel from the rich to productive firms
that urgently need it, especially small and
medium-sized enterprises (SMEs), is a new
goal for the authorities. We believe that if
this new goal can be successfully achieved,
the relationship between money growth and
housing frenzies can be greatly reduced; at
the same time, this will lead to a good com-
promise among monetary policy, economic
growth and a stable housing market.
Conclusions
The reason for the rapid appreciation of
urban residential rents in Chinese cities
remains an unsettled question. Moreover,
the residential rents as determined from the
CPI are directly connected to the living
Chiang
standards of the public. The purpose of this
study is to examine the sources of residential
rent inflation to better analyse the relation-
ship between the monetary policy and resi-
dential rent inflation. In this paper, SS
analysis is introduced to simultaneously inte-
grate the four possible sources of inflation,
including national inflation, structural fac-
tors from urban and sectoral aspects, and
the spatial rent bubble, in order to evaluate
urban residential rent inflation in three mega
cities in China.
Based on the estimation results, the sources
of residential rent inflation are found to be
totally different before and after the GFC.
During the stable period, the source of resi-
dential rent is mainly LFE as the degree of
localised residential rent frenzies due to an
irrational increase in the residential rental
market. In contrast, a new wave of rising resi-
dential rents may be traced back to Chinese
expansionary monetary policy that began
with the 2008 GFC to create excess liquidity
through the growth of the money supply and
the removal of credit restrictions. How to
carry out more stable rules in monetary policy
is therefore a possible path to resolve the cur-
rent residential rent inflation issue.
Acknowledgements
I would like to thank the editor and three anon-
ymous referees for their most valuable comments
to greatly improve the earlier version of this
paper. I am also indebted to Shang-hsien Chiang,
my father and my family for inspiring and sup-
porting my research.
Funding
Financial support is offered by Ministry of
Science and Technology, Taiwan (NSC 102-2410-
H-033 -030 -MY2).
Notes
1. A long-run co-integration relationship
between housing prices and rents led them to
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3507
conclude that housing rent is a better proxy
than income when calculating the magnitude
of the housing bubble (Brunnermeier and
Julliard, 2007; Gallin, 2008).
2. Data of CPI and its sectoral CPIs in China
are at most disaggregated into 31 provincial
units, including our three mega cities directly
under the central government management,
while time-series data of CPI cannot be
obtained in other cities.
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