Beijing should keep its interest rate high and the real estate sector cool, according to a recent report from top research body the Chinese Academy of Social Sciences (CASS).

CASS economists said in the report, 2006-07: World Economy Analysis and Forecast, that it was necessary to keep the interest rate high and real estate cool to avoid the risk of a crisis such as the one Japan weathered in the 1990s.

"China should not increase domestic demand on the price as it could risk enlarging the real estate bubble," according to the report.

China should draw lessons from Japan in the 1980s, when the country's low interest rates caused domestic demand to rise so much it eventually created a huge real estate bubble for the economy.

"There are amazing similarities between the current Chinese real estate market and that of Japan's in the 1980s," the report said.

"Prices in China's property market have grown fast, and inflation hasn't caught up yet.
"But after two consecutive years of gross domestic product growth surpassing double digits, signs of inflation have appeared."

In 1985 under the Plaza Accord the Japanese yen immediately appreciated, heating up its real estate market. In the following six years commercial land prices in its six major cities increased threefold to three times higher than those in the United States at the time.

Investors considered the property market was the best and most stable to invest in and believed interest rates would not change. It was easy to get loans from banks.

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