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