Moreover, policies aimed at stabilizing the exchange rate andkeeping interest rates low have caused capital and risk to becomeundervalued in large projects. And local governments’ effort tofinance development by selling land to investors at artificiallylow prices has spurred massive investment in real-estatedevelopment, causing property prices to rise at unsustainably highrates. Given property’s role as the main form of collateral forbank loans, financial risk has risen sharply.
In fact, both approaches have a role to play, particularly inChina, where the government is pursuing a more market-orientedgrowth strategy but retains considerable control over many aspectsof the economy. China needs to strike a balance betweenpolicy-supported stability and market-driven progress.