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Can bank credit withstand falling house price in China?

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  • Su, Chi-Wei
  • Cai, Xu-Yu
  • Qin, Meng
  • Tao, Ran
  • Umar, Muhammad

Abstract

This paper examines whether the falling house price causes credit risk or not in China. We note that bidirectional causal relationships exist in several sub-periods using sub-sample rolling window test. Our analysis confirms the option-based model (Foster & Van Order, 1984) that proves the falling house price leads to more defaults of mortgage and increasing credit risk. Meanwhile, the rise in credit risk is likely to be accompanied by the increasing house price. Rising house price has no impact on credit risk. We find banks’ credit expansion may be irrational which leads to the accumulation of credit risk. The tight credit policies and high loan interest rates stimulate the house price to fall. In addition, based on the analysis of the previous periods, we do not think that the credit risk will explode systematically in China with the current situation of mortgage growth slowing down. However, due to the pivotal role of real estate credit in loan structure of banks in China, we still need to be alert to the potential accumulation credit risk caused by the default of individuals and enterprises. It is essential for banks to strengthen the examination of personal credit certificates to prevent speculative loans. Regulators should take into account the impact on bank credit when they formulate policies to control the house price.

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  • Su, Chi-Wei & Cai, Xu-Yu & Qin, Meng & Tao, Ran & Umar, Muhammad, 2021. "Can bank credit withstand falling house price in China?," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 257-267.
  • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:257-267
    DOI: 10.1016/j.iref.2020.09.013
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    More about this item

    Keywords

    Bootstrap rolling windows; House price; Credit risk;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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