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Real Estate Boom and Misallocation of Capital in China

Author

Listed:
  • Ting Chen

    (Princeton University)

  • Laura Xiaolei Liu

    (Guanghua School of Management)

  • Wei Xiong

    (Princeton University)

  • Li-An Zhou

    (Guanghua School of Management)

Abstract

This paper analyzes how real estate shocks affect corporate investment in China. In addition to the widely documented collateral channel, we also uncover two other channels: the speculation channel—rapidly rising commercial land prices induce manufacturing and service firms to buy more commercial land, which is unrelated to their core businesses, and to reduce other investments and innovation activities, and the crowding out channel—in response to rising land prices, banks grant more credit to land-holding firms, crowding out financing to non-land-holding firms. Through both channels, a 100-percentage-point increase in land price leads to 26 percentage points of TFP losses due to misallocation of capital.

Suggested Citation

  • Ting Chen & Laura Xiaolei Liu & Wei Xiong & Li-An Zhou, 2017. "Real Estate Boom and Misallocation of Capital in China," Working Papers 2017-1, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2017-1
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    Citations

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    Cited by:

    1. Zheng, Xian & Xie, Xiaorong & Zheng, Linzi, 2023. "Land market concentration, developers’ pricing decisions, and class monopoly rent in urban China," Land Use Policy, Elsevier, vol. 132(C).
    2. Gao,Nan & Ma,Yuanyuan & Xu,L. Colin, 2020. "Credit Constraints and Fraud Victimization : Evidence from a Representative Chinese Household Survey," Policy Research Working Paper Series 9460, The World Bank.
    3. Shawn Xiaoguang Chen & Yudan Cheng & Liutang Gong & Wenjia Tian, 2023. "A Big Push of Panda from the Ground: Land Subsidy and Structural Transformation in China," Economics Discussion / Working Papers 23-09, The University of Western Australia, Department of Economics.
    4. Ma, Chao & Zhang, Shuoxun, 2024. "Can housing booms elevate financing costs of financial institutions?," Journal of Development Economics, Elsevier, vol. 167(C).
    5. Eswar Prasad, 2023. "Has China's Growth Gone from Miracle to Malady?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 54(1 (Spring), pages 243-270.
    6. Jingzhu Chen & Yuemei Ji, 2022. "Is Finance Good for Growth? New Evidence from China," CESifo Working Paper Series 9882, CESifo.
    7. Shenzhe Jiang & Jianjun Miao & Yuzhe Zhang, 2022. "China'S Housing Bubble, Infrastructure Investment, And Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1189-1237, August.
    8. Lu Liu & Yu Tian & Haiquan Chen, 2023. "The Costs of Agglomeration: Misallocation of Credit in Chinese Cities," Land, MDPI, vol. 12(3), pages 1-19, February.

    More about this item

    Keywords

    China; Land Prices; Collateral Channel; Speculation Channel; Crowding Out Channel; Misallocation of Capital;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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