Real estate collateral value and investment: The case of China |
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| Affiliation: | 1. General Education Center, Kainan University, No. 1 Kainan Road, Luzhu Shiang, Taoyuan, Taiwan;2. Department of Public Finance, National Chengchi University, No. 64, ZhiNan Road Sec. 2, Taipei 116, Taiwan;3. School of Economics, Henan University, Jin Ming Avenue, Kaifeng 475004, China;1. Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332, Singapore;2. Institute of Real Estate Studies, National University of Singapore, Singapore |
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| Abstract: | Previous research on the United States and Japan finds economically large impacts of changing real estate collateral value on firm investment that amplified the business cycles of those countries. Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, we estimate investment equations that yield no evidence of a collateral channel effect. Further analysis indicates that China’s debt is not characterized by the frictions that give rise to collateral channel effects elsewhere. Essentially, financially constrained borrowers appear able credibly to commit to repay debt in China. While there is no impact on investment via the collateral channel, our results should not be interpreted as implying there will be no negative fallout from a potential real estate bust on the Chinese economy. There likely would be, but through different channels. |
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| Keywords: | Housing and land markets Collateral channel Financial constraints Firm investment |
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