Excessive Financial Support, Real Estate Development and Macroeconomic Growth: Evidence from China

ABSTRACT

Using monthly panel data for China’s 30 provinces from 2007 to 2017, this article analyzes how level of financial support affects the interplay between real estate development and macroeconomic growth. Based on a threshold model, the results suggest that housing price increases substantially impede economic growth, but there is no significant threshold effect for the sample as a whole. On investigating regional cross-sectional variations, we found that local economic situation clearly impacts on this effect, with significant threshold effects detected in subsamples. While housing price may have positive influences on economic growth in the mid-west subgroup with appropriate financial support, more developed regions returned contrary results.

KEY WORDS:

• economic growth
• financial support
• housing price
• threshold effect

Notes

1. For more details, please refer to Hansen (1999).

2. In China, commercial housing is purchased mainly by individuals. With financial development, 80% of housing funds are provided by the banks.

3. Results are shown in Appendix.

4. Differences between China’s east and mid-west include geographic variation and institutional development; of these, differences in economic level are most prominent. Since China’s reform and opening up, the east has always been prioritized for development and is therefore ahead of the mid-west region in terms of resources, occupation, high technology, and financial advancement, leading ultimately to a huge gap between the two regions in terms of economic development. For that reason, we divided the sample into these two groups to determine the influence of economic disparity. The East group includes 14 regions while the mid-west group has 16 regions.

5. The developed subgroup contains eight regions: Beijing, Shanghai, Tianjin, Chongqing, Guangdong, Shandong, Jiangsu, and Zhejiang. The first four are China’s municipalities, and the latter four exhibit the highest GDP. We constructed this subsample to represent the highest level of economic development in China.