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Real estate collateral value and investment: The case of China

Author

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  • Wu, Jing
  • Gyourko, Joseph
  • Deng, Yongheng

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.

Suggested Citation

  • Wu, Jing & Gyourko, Joseph & Deng, Yongheng, 2015. "Real estate collateral value and investment: The case of China," Journal of Urban Economics, Elsevier, vol. 86(C), pages 43-53.
    • Handle: RePEc:eee:juecon:v:86:y:2015:i:c:p:43-53
    DOI: 10.1016/j.jue.2014.12.006
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    More about this item

    Keywords

    Housing and land markets; Collateral channel; Financial constraints; Firm investment;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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