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The Spillover Effects of a Downturn in China’s Real Estate Investment

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  • Ashvin Ahuja
  • Alla Myrvoda
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    Abstract

    Real estate investment accounts for a quarter of total fixed asset investment (FAI) in China. The real estate sector’s extensive industrial and financial linkages make it a special type of economic activity, especially where the credit creation process relies primarily on collateral, like in China. As a result, the impact on economic activity of a collapse in real estate investment in China—though a low-probability event—would be sizable, with large spillovers to a number of China’s trading partners. Using a two-region factor-augmented vector autoregression model that allows for interaction between China and the rest of the G20 economies, we find that a 1-percent decline in China’s real estate investment would shave about 0.1 percent off China’s real GDP within the first year, with negative spillover impacts to China’s G20 trading partners that would cause global output to decline by roughly 0.05 percent from baseline. Japan, Korea, and Germany would be among the hardest hit. In that event, commodity prices, especially metal prices, could fall by as much as 0.8–2.2 percent below baseline one year after the shock.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/266.

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    Length: 24
    Date of creation: 05 Nov 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/266

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    Related research

    Keywords: Investment; China; Real estate prices; Housing; External shocks; Spillovers; Economic models; Real estate investment; FAVAR; bond; bond spread; stock market; bond spreads; financial stability; sovereign bond; bonds; bond yield; treasury bond; financial system; stock exchange; treasury bonds; benchmark government bond; stock market index; stock market indices; stock market indexes; property developers; real estate transaction; savings deposits; bond yields; stock exchange index; financial institutions; government bonds; residential real estate; financial sector; stock index;

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    1. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
    2. Jean Boivin & Marc P. Giannoni, 2007. "Global Forces and Monetary Policy Effectiveness," NBER Chapters, in: International Dimensions of Monetary Policy, pages 429-478 National Bureau of Economic Research, Inc.
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