Study on the China’s real interest rate after including housing price factor into CPI

Abstract

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 Consumer Price Index (CPI). However, based on official China’s interest rates and CPI, over half of the years China’s actual interest rate remained higher than CPI by our calculation from 1999 to 2022. This is inconsistent with the financial repression that exists in China, and the main reason is the calculation methods of China’s CPI. China’s CPI measurement system originated from the planned economy era, which did not fully consider the rise in housing purchase prices, so the current CPI measurement system can be more realistically presented by taking the rise in housing prices into consider. The core idea of this study is to mining relevant official statistical data and calculate the proportion of Chinese residents’ expenditure on purchasing houses to their total expenditure. By taking the proportion of house purchases as the weight of house price factor, and taking the proportion of other consumption as the weight of official CPI, the Generalized CPI (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. This study has found that if GCPI is used as a measure, China’s real interest rates have been negative for most years since 1999. Chinese residents have suffered the negative effects of financial repression over the past 20 years, and their property income cannot keep up with the actual losses caused by inflation. Therefore, it is believed that China’s CPI calculation method should be adjusted to take into account the rise in housing prices, so China’s actual inflation level could be more accurately reflected. In view of the above, deepening interest rate marketization reform and expand channels for financial investment are the future development goals of China’s financial system.