IDEAS home Printed from https://ideas.repec.org/a/gam/jlands/v11y2022i11p1967-d962165.html
   My bibliography  Save this article

Debt-Driven Property Boom, Land-Based Financing and Trends of Housing Financialization: Evidence from China

Author

Listed:
  • Jia Li

    (Investment Research Institute, Academy of Macroeconomic Research, NDRC, Beijing 100038, China)

  • Rachel Tochen

    (Bethel School District, Eugene, OR 97402, USA)

  • Yaning Dong

    (Research Institute for Eco-Civilization, Chinese Academy of Social Sciences, Beijing 100710, China)

  • Zhuoran Ren

    (College of Urban and Environmental Science, Peking University, Beijing 100871, China)

Abstract

To cope with the global financial crisis, China’s governments issued huge amount of debt to support public infrastructure projects. These financing mechanisms brought about rapid economic restoration, as well as large amounts of debt accumulation. Among other outcomes of this were increasing the leverage in property markets and advancing the extent of financialization in China’s local economy. Financialization level measures the proportion of the total volume of financing provided by the financial system to the real economy, which covers all the generated debts connecting within real economy and financial system. In this study, we outline the mechanism of housing-centered debt expansion process, land-based financing for local governments and trends of housing financialization in local China. Most importantly, the functions of land in such mechanism is highly emphasized. We run fixed-effect and random-effect models to testify the correlation between the kernel variables—financialization level and real estate investment and public infrastructure. To lower the endogenous problems in the estimation, we use instrumental variables (IV) methods and estimate by the two-stage OLS (2SLS) method. The results show that 1% increase (or decrease) of financialization level (measured by the indicator of Aggregate Financing to Real Economy as percentage of GDP) brings about a significant increase (or decrease) of 48% of real estate investment and 59% of public infrastructure investment nationally. Based on the results, we deduce an overview of debt-driven mechanism in China’s local economy named dual financing circulation, which contains two parallel financing circuits, governmental financing based on lands as collateral and market financing based on properties. Finally, the study reveals some new trends of financialization in property markets. Therefore, the major originality of paper is theoretically combining the governmental and private financing circuits as a whole framework for better understanding the financialized local economy of China and putting forward some policy implementations, such as reducing and setting ceilings on leverage of real estate developers in China.

Suggested Citation

  • Jia Li & Rachel Tochen & Yaning Dong & Zhuoran Ren, 2022. "Debt-Driven Property Boom, Land-Based Financing and Trends of Housing Financialization: Evidence from China," Land, MDPI, vol. 11(11), pages 1-23, November.
    • Handle: RePEc:gam:jlands:v:11:y:2022:i:11:p:1967-:d:962165
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2073-445X/11/11/1967/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2073-445X/11/11/1967/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Manuel B. Aalbers, 2017. "The Variegated Financialization of Housing," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 41(4), pages 542-554, July.
    2. Gordon L. Clark, 2002. "London in the European financial services industry: locational advantage and product complementarities," Journal of Economic Geography, Oxford University Press, vol. 2(4), pages 433-453, October.
    3. Beng Huat Chua, 2015. "Financialising public housing as an asset for retirement in Singapore," International Journal of Housing Policy, Taylor & Francis Journals, vol. 15(1), pages 27-42, January.
    4. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    5. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    6. William Milberg & Deborah Winkler, 2010. "Financialisation and the dynamics of offshoring in the USA," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 34(2), pages 275-293, March.
    7. Lili Wu & Yang Bian, 2018. "Housing, consumption and monetary policy: how different are the first-, second- and third-tier cities in China?," Applied Economics Letters, Taylor & Francis Journals, vol. 25(15), pages 1107-1111, September.
    8. Andy Pike & Jane Pollard, 2010. "Economic Geographies of Financialization," Economic Geography, Clark University, vol. 86(1), pages 29-51, January.
    9. Wu, Fulong, 2022. "Land financialisation and the financing of urban development in China," Land Use Policy, Elsevier, vol. 112(C).
    10. Gertjan Wijburg, 2021. "The de-financialization of housing: towards a research agenda," Housing Studies, Taylor & Francis Journals, vol. 36(8), pages 1276-1293, October.
    11. Yunyang Ji & Xiaoxin Guo & Shihu Zhong & Lina Wu, 2020. "Land Financialization, Uncoordinated Development of Population Urbanization and Land Urbanization, and Economic Growth: Evidence from China," Land, MDPI, vol. 9(12), pages 1-22, November.
    12. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "The great mortgaging: housing finance, crises and business cycles," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 107-152.
    13. Guo, Shen & Shi, Yingying, 2018. "Infrastructure investment in China: A model of local government choice under land financing," Journal of Asian Economics, Elsevier, vol. 56(C), pages 24-35.
    14. Mian, Atif & Sufi, Amir, 2015. "House of Debt," University of Chicago Press Economics Books, University of Chicago Press, number 9780226271651, December.
    15. repec:hal:spmain:info:hdl:2441/75koqefued8i7pihbrl9u84p4u is not listed on IDEAS
    16. Graeme Newell & Kwong Wing Chau & Siu Kei Wong, 2009. "The significance and performance of infrastructure in China," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 27(2), pages 180-202, March.
    17. Min Zhang & Mark D. Partridge & Huasheng Song, 2020. "Amenities and the geography of innovation: evidence from Chinese cities," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 65(1), pages 105-145, August.
    18. Lim, G.C. & McNelis, Paul D., 2016. "Quasi-monetary and quasi-fiscal policy rules at the zero-lower bound," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 135-150.
    19. Ming Su & Quanhou Zhao, 2006. "The fiscal framework and urban infrastructure finance in China," Policy Research Working Paper Series 4051, The World Bank.
    20. Chen, Jie & Wu, Fulong & Lu, Tingting, 2022. "The financialization of rental housing in China: A case study of the asset-light financing model of long-term apartment rental," Land Use Policy, Elsevier, vol. 112(C).
    21. Ye Guo & Wenbin Xu & Zhiyuan Zhang, 2016. "Leverage, Consumer Finance, and Housing Prices in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 461-474, February.
    22. Beng Huat Chua, 2015. "Financialising public housing as an asset for retirement in Singapore," European Journal of Housing Policy, Taylor and Francis Journals, vol. 15(1), pages 27-42, January.
    23. A. Guironnet & K. Attuyer & L. Halbert, 2016. "Building cities on financial assets: The financialisation of property markets and its implications for city governments in the Paris city-region," Post-Print halshs-01258810, HAL.
    24. Li, Zhigang & Wu, Mingqin & Chen, Bin R., 2017. "Is road infrastructure investment in China excessive? Evidence from productivity of firms," Regional Science and Urban Economics, Elsevier, vol. 65(C), pages 116-126.
    25. Chen, Jie & Wu, Fulong, 2022. "Housing and land financialization under the state ownership of land in China," Land Use Policy, Elsevier, vol. 112(C).
    26. Qingshan Kong & Haiyang Kong & Silin Miao & Qin Zhang & Jiangang Shi, 2022. "Spatial Coupling Coordination Evaluation between Population Growth, Land Use and Housing Supply of Urban Agglomeration in China," Land, MDPI, vol. 11(9), pages 1-18, August.
    27. Firat Demir, 2007. "The Rise of Rentier Capitalism and the Financialization of Real Sectors in Developing Countries," Review of Radical Political Economics, Union for Radical Political Economics, vol. 39(3), pages 351-359, September.
    28. Aveline-Dubach, Natacha, 2022. "The financialization of rental housing in Tokyo," Land Use Policy, Elsevier, vol. 112(C).
    29. David Zalewski & Charles Whalen, 2010. "Financialization and Income Inequality: A Post Keynesian Institutionalist Analysis," Journal of Economic Issues, Taylor & Francis Journals, vol. 44(3), pages 757-777.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Isil Erol, 2019. "New Geographies of Residential Capitalism: Financialization of the Turkish Housing Market Since the Early 2000s," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 43(4), pages 724-740, July.
    2. Zhenfa Li & Fulong Wu & Fangzhu Zhang, 2023. "State de-financialisation through incorporating local government bonds in the budgetary process in China," Journal of Economic Geography, Oxford University Press, vol. 23(5), pages 1169-1190.
    3. Manuel B. Aalbers, 2017. "The Variegated Financialization of Housing," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 41(4), pages 542-554, July.
    4. Deeksha Gupta & Itay Goldstein, 2016. "Sustainable Housing Policy," 2016 Meeting Papers 607, Society for Economic Dynamics.
    5. Carro, Adrian, 2023. "Taming the housing roller coaster: The impact of macroprudential policy on the house price cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    6. Berrak Bahadir & Inci Gumus, 2021. "House Prices, Collateral Effects and Sectoral Output Dynamics in Emerging Market Economies," Working Papers 2105, Florida International University, Department of Economics.
    7. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    8. Bahadir, Berrak & Gumus, Inci, 2022. "House prices, collateral effects and sectoral output dynamics in emerging market economies," Journal of International Money and Finance, Elsevier, vol. 129(C).
    9. Punzi, Maria Teresa, 2016. "Financial cycles and co-movements between the real economy, finance and asset price dynamics in large-scale crises," FinMaP-Working Papers 61, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    10. David R. Meyer, 2016. "Shenzhen in China's Financial Center Networks," Growth and Change, Wiley Blackwell, vol. 47(4), pages 572-595, December.
    11. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    12. Ono, Arito & Uchida, Hirofumi & Udell, Gregory F. & Uesugi, Iichiro, 2021. "Lending pro-cyclicality and macroprudential policy: Evidence from Japanese LTV ratios," Journal of Financial Stability, Elsevier, vol. 53(C).
    13. Joel Rabinovich & Niall Reddy, 2024. "Corporate Financialization: A Conceptual Clarification and Critical Review of the Literature," Working Papers PKWP2402, Post Keynesian Economics Society (PKES).
    14. Yan Yan & Hui Liu & Ningcheng Wang & Shenjun Yao, 2021. "How Does Low-Density Urbanization Reduce the Financial Sustainability of Chinese Cities? A Debt Perspective," Land, MDPI, vol. 10(9), pages 1-18, September.
    15. Wilhelmsson, Mats, 2020. "What role does the housing market play for the transmission mechanism?," Working Paper Series 20/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    16. Guo, Zi-Yi, 2017. "Information heterogeneity, housing dynamics and the business cycle," EconStor Preprints 168561, ZBW - Leibniz Information Centre for Economics.
    17. Josh Ryan-Collins, 2021. "Breaking the housing–finance cycle: Macroeconomic policy reforms for more affordable homes," Environment and Planning A, , vol. 53(3), pages 480-502, May.
    18. Illing, Gerhard & Ono, Yoshiyasu & Schlegl, Matthias, 2018. "Credit booms, debt overhang and secular stagnation," European Economic Review, Elsevier, vol. 108(C), pages 78-104.
    19. Fernández-Amador, Octavio, 2016. "Finance-augmented business cycles: A robustness check," Papers 1038, World Trade Institute.
    20. Kate Gasparro & Ashby Monk, 2020. "Demystifying “localness†of infrastructure assets: Crowdfunders as local intermediaries for global investors," Environment and Planning A, , vol. 52(5), pages 878-897, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jlands:v:11:y:2022:i:11:p:1967-:d:962165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.