While the global economy suffers, China’s housing juggernaut shows no signs of slowing. After the briefest of blips, residential transactions are back at a record level, up 80 percent this year alone. Prices, already having risen every year for more than a decade, are exploding in tandem, and speculators are shopping properties with the expectation that the market will continue to flourish.

Many observers, including those in the government, have voiced concerns that the boom could indicate a growing bubble that, if it were to burst, would seriously damage China’s economy. Especially after the recent collapse of the U.S. housing market, which contributed to the worldwide economic recession, international concerns about China’s housing market are not groundless.
However, the significant differences between the Chinese and American situations should relieve American apprehension of a Chinese housing bubble. A growing economy, continued urbanization, and a different banking system mean a housing bubble followed by a burst is less likely to occur in China. Furthermore, the Chinese government is already taking steps to prevent the collapse of its housing market.

One report that led to fear of a Chinese housing bubble showed that housing price hikes have outpaced increases in income. According to this report, the cost of one square meter is equal to an average resident’s salary of seven months. But this report is not entirely accurate; in reality, the report underestimates people’s actual incomes, which are grossly underreported in China. China’s tax report system explains why. While U.S. citizens report their income individually to the Internal Revenue Service, Chinese companies report and pay income taxes for individual employees. As a result, Chinese companies illegally report lower salaries in order to decrease the amount of taxes they must pay. Because of this trend, the difference between the rise in housing prices and income is not nearly as significant as reported.

The Chinese financial market is also fundamentally different from the U.S. market. To qualify for a residential loan in China, consumers are required to put down a large down payment: 30 percent for the buyers’ first home and 50 percent for additional properties. Therefore, Chinese buyers don’t exhibit the reckless behavior that was rampant, even encouraged, in the United States prior to the collapse of the financial system. Furthermore, the Chinese banking system does not suffer from extreme securitization of mortgages by financial institutions. Original lenders generally hold mortgages in China. Considering it was also excessive leverage, not high prices, that caused the real estate meltdown in the U.S., there is still room for optimism on this front.

Another difference between the current situation in China and the conditions leading to the U.S. bubble is demand. Urbanization in China is growing, suggesting that even if speculative buying slows, demand for housing will remain high. According to the State Council, as many as 400 million people will move to cities by 2035. The Chinese government has expressed its intent to ensure these migrants access to affordable housing. Thus, a collapse is not likely in a housing market experiencing steady demand and matching supply.

Nevertheless, given that traditional savings accounts yield less than 1 percent interest annually and playing the stock market is perceived as high-risk gambling in China, real estate remains very enticing for speculators and investors, signaling the need to be vigilant about a possible housing bubble. With a clear understanding of this behavior, the Chinese government has demonstrated a willingness to intervene early to prevent a collapse.

Last November, Beijing introduced a new real estate sales tax aimed at cooling the property market fever. Designed to discourage the “flipping” of houses by speculators, this nationwide tax policy instituted a sales tax of 5.5 percent to anyone selling a second apartment within five years of its purchase. Further policies are on the way. The State Council issued a statement on April 15th laying out specific measures to further curb exorbitant housing prices. The details included raising mortgage rates and down payment requirements, and allowing banks to refuse credit to buyers who the banks believe to be speculating.

Although the Chinese government was right to take preliminary steps to control housing prices, immediately after it outlined its intervention plan, worries over the measures dampened the stock market. The announcement led to a drop in Hong Kong’s property index, and the Hang Seng Property Index dropped to a three-week low. Critics worry that the tightening of credit would not only cool down the overheated market, but could cause it to freeze. These fears are unfounded for now; the HSNP soon bounced back, albeit to a lower level, and credit remained available, exactly what the government wanted. Drastic policies, however, could create a damaging credit crunch.

Beyond these changes, China has even more tools in reserve to prevent the boom from becoming a bubble. The introduction of property tax and the revaluation of its currency could help make China’s housing market sustainable. In the absence of property taxes, the costs of holding empty homes is very low, which provides a great incentive to speculators in buying real estate for investment purposes. Beijing’s hesitation to levy the property tax largely stems from local governments’ reliance on property sales as their major source of revenue. It makes little sense to the government officials to reduce their income by keeping down the property prices in normal times. If things get out of hand, however, a property tax could keep them in control. Also, in order to keep its currency artificially devalued, China’s central bank has to spend billions of dollars buying U.S. Treasury bills, which significantly hinders its ability to use monetary policy to quell rising prices. Revaluation would put strains on China’s export industries, by raising the prices of Chinese goods, but would more than compensate by stabilizing the overall economy.

Given the grave dangers posed by a collapsed housing market, the signs of China’s growing bubble certainly call for vigilance and international attention. However, the evidence suggests that panic is not yet in order; China’s unique housing dynamics and its government’s quick policy responses are happily keeping the boom under wraps.

On October 6th, President Barack Obama decided to put off a meeting with the Dalai Lama, who spent a week in Washington late last month. The occasion would have marked the first meeting between President Obama and the Tibetan spiritual leader. Instead, for the first time in eighteen years, the Dalai Lama visited Washington and did not meet with the President. Analysts in Washington were surprised that Obama deferred meeting with the spiritual leader, and his critics on the right harshly criticized him for doing so.

President Obama’s decision not to meet with the Dalai Lama indicates a broader shift in U.S. foreign policy in East Asia. After successfully hosting the Olympics last summer and improving its relationship with Taiwan, China is gaining power and influence and is now a member of the honorary “G2”—the ever-shrinking elite group of superpowers whose only other member is the United States. The Obama administration is working with a new—and potentially more dangerous—China and has calculated that the best way to maintain strong ties with the emerging power is to downplay the issue of Tibet and human rights concerns more generally. As part of this broader policy, Obama put off his visit with the Dalai Lama at least until after he meets with Chinese President, Hu Jintao.

The China-Tibet conflict has been a critical human rights and international relations issue for decades. China claims that Tibet has been part of its territory for four centuries, while Tibetans argue that they have been effectively independent for most of their history and possess their own distinct culture and ethnicity. These contentions turned into violent conflict last year during the Beijing Olympics, when a series of anti-Chinese protests broke out in Tibet. The issue even led to worldwide confrontations between pro-Tibetan and pro-Chinese demonstrators in Paris, London, and San Francisco. The U.S. government, as the leading advocate for human rights in the international community, responded to this incident by urging China to respect “the fundamental and universally recognized rights” set out in the Geneva Conventions.

The United States has generally taken a strong stance against violations of human rights in China. Former President George W. Bush awarded the Dalai Lama with the Congressional Gold Medal in the face of repeated warnings from China, making clear the United States’ support for the ideals of autonomy and freedom. But while Bush unwaveringly supported the expansion of democracy and human rights across the globe, Obama has proven willing to subordinate these ideals to shorter-term concerns. So given China’s meteoric rise to world power, Obama sees a more practical need to win China’s support for crucial economic and environmental policies.

But many in the U.S. rightly oppose this controversial policy shift. Indeed, Obama’s choice to avoid a meeting with the Dalai Lama was harshly criticized at home, especially on the right. Commentators have argued that the Dalai Lama’s visit symbolizes the U.S. influence in the realm of human rights. They claim that by shunning the spiritual leader Obama has demonstrated a lack of concerns for human rights issues, particularly in powerful states like China.

More generally, critics claim that the United States has become too economically dependent on China, and therefore too susceptible to China’s demands. In the current economic climate, this criticism may be the most salient. The economic downturn has created a delicate situation in which the U.S. struggles with national recession while China funds large fiscal deficits by buying U.S. treasury bills. As long as the U.S. remains beholden to China to finance its large national debt, China will have strong leverage over the U.S. on other crucial issues like human rights.

Unsurprisingly, the postponement of Obama’s visit has done nothing to ease tensions between the Chinese government and the Tibetan leader. Chinese foreign ministry spokeswoman Jiang Yu said recently that the White House should not allow the Dalai Lama to engage in separatist activities in the U.S. and called the Dalai Lama a “wolf in monk’s robe.” In response, the Dalai Lama accused China of “acting like a child” and claimed his visits are anything but political. He added that he only sought genuine autonomy for Tibetans in China.

Compromises are an inevitable aspect of policymaking. In choosing to put off his meeting with Dalai Lama, Obama had to decide which foreign policy agenda was more important: pursuing human rights or cultivating a stronger relationship with Beijing. From a realist outlook, a nation acts rationally in pursuit of relative power; if China is steadfast in its policies toward human rights, pandering to them will not change their stance. Furthermore, if the U.S. yields to China’s demands it could give an unwarranted impression in the long-term as kowtowing to both U.S. voters and China itself.

President Obama is known for his diplomacy and commitment to peace. He should have used this skill for diplomacy to convince Chinese officials that the Dalai Lama’s visit was irrelevant to U.S.-China relations or perhaps even beneficial in resolving China’s conflict with Tibet. The Dalai Lama has historically maintained his role as a religious figure and not assumed a political position during his visits to the White House. The Dalai Lama has visited Washington ten times over the past eighteen years with no adverse affects on U.S.-China relations. President Obama should have pointed this out in defending the visit rather than acceding to Chinese interests on the issue.

China now has a powerful voice in international affairs that U.S. should not ignore. And though prudence is a desirable approach in politics sticking to the one’s belief and ideals is equally important. In the wake of his postponed visit with the Dalai Lama, Obama must maintain a balance between these two competing goals. He must not be afraid to stand on principle, even when it has short-term costs in international politics.