Collateral versus crowding out: policy implications on China’s housing and manufacture sectors

We study the mechanisms through which macroeconomic level shocks, namely macro easing and industry curbing policies from the government and housing preference shock from the households, exert their impact on the real estate and manufacturer sectors in China. Our analysis shows that whilst the macro easing monetary policy stimulates overall investment in the two sectors, it also causes the crowding out effect, inducing the capital flow disproportionally to the real estate industry. In this sense, it resembles the positive housing preference shock by contributing to the imbalance between housing and real industry. Meanwhile, policies aimed at curbing real estate boom have a leakage effect, which can offset the crowding out effect from the housing preference and easing monetary policy shocks. Both crowding out and leakage effects stem from the heterogeneous characteristics of durable and non-durable goods produced by real estate and manufacture sectors, respectively, instead of from heterogeneous borrowing constraints. Our results add to the understanding of transmission mechanisms of different policies on production sectors and provide insights for policy makers on how to effectively apply policies to affect the economy in a macro-prudential way.