The effects of monetary policies on real estate development financing in China

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The effects of monetary policies on real estate development financing in China


Author: Wei, Yigang
Title: The effects of monetary policies on real estate development financing in China
Degree: Ph.D.
Year: 2013
Subject: Real estate business -- China.
Real property -- Government policy -- China.
Monetary policy -- China.
Hong Kong Polytechnic University -- Dissertations
Department: Dept. of Building and Real Estate
Pages: xvi, 282 leaves : ill. (some col.) ; 30 cm.
Language: English
Abstract: This research investigates the effects of monetary policies on real estate development financing in mainland China based on monetary policy transmission theories. Literature suggests that monetary policy can affect the real economy in several ways, the most noteworthy being through the interest rate channel and the credit channel. Apart from a short period of expansionary monetary policy to mitigate the immediate impact of the 2008 financial tsunami, monetary constriction has been the main policy direction of China during the past decade. From 2003 to 2011, the macro-monetary policy was executed proactively to constrain investment, especially in the overheated real estate industry. The overarching aim was to bring housing prices in line with economic development by discouraging excessive credit to the real estate sector. The tight credit condition was created by successive increases in the reserve ratio and interest rates, and a series of strict credit rationing directives. Despite these measures, speculative activities in the real estate market remained rampant until 2011. A disconnect was observed between the monetary policy stances and developers' increased activities. To find the explanations for the above anomalies, the research framework of this thesis was developed as follows: it started with an investigation on the impacts of monetary policies transmitted through the interest rate and the credit channels to real estate developers from 2003 to 2010, taking into account the regional heterogeneity of the market. Then, ensuing from the credit channel, hypotheses about the independent existence of the bank lending and balance sheet channels were tested, followed by an examination of the dynamic responses of major real estate economic variables to monetary policy shocks that were transmitted by the interest rate channel. Econometric methods used in the research include the panel data estimation model, Granger causality test, and the Factor-Augmented Vector Autoregression model.
Generally, empirical research shows that the effects of the monetary policy on the real estate industry via the interest rate channel are weak and can hardly control the overheated real estate industry because some of these effects are counterproductive. In contrast, the credit channel is a potentially effective means to regulate the property market. However, in the period under study, several limitations inhibited the effective transmission of the monetary policy. The main findings of this research are summarized as follows: first, interest rate increases led to investment and "price puzzle" problems in the real estate industry and attracted substantial capital inflows into the property sector, thereby fueling real estate price inflations. Second, the credit channel was operative in the real estate sector, as evidenced by the statistically significant and positive impacts of bank lending on real estate investment. Third, the bank lending channel was blocked because of the passive implementation of policies and regulations by incumbent commercial banks. Fourth, the operation of the balance sheet channel was also obstructed in the real estate sector because of the bilateral nexus between property prices and credit. More specifically, rapid property price inflations reinforced the balance sheets of real estate borrowers and attracted bank loans to this sector. Credit growth further triggered property price appreciation. Hence, controlling banks' lending activities could subdue real estate overinvestment in China more effectively. The research framework was reinforced by views obtained from field studies, which supplemented the results of the above quantitative analysis. A series of interviews with property practitioners was conducted to explain the reasons behind the less-than-expected results of the macro-monetary control measures in the period under study. This research gave a number of recommendations for the government to better steer the real estate market, including the need for the government and the industry to make concerted efforts and consistent headway for a complete, transparent, and responsive set of institutional arrangements.

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