Capital Scarcity and Industrial Decline: Evidence from 172 Real Estate Booms in China

Harald Hau and Difei Ouyang
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Difei Ouyang: University of Geneva

No 18-38, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In geographically segmented credit markets, local real estate booms can divert capital away from manufacturing firms, create capital scarcity, increase local real interest rates, lower real wages, and cause underinvestment and relative decline in the industrial sector. Using exogenous variation in the administrative land supply across 172 Chinese cities, we show that the predicted variation in real estate prices does indeed cause substantially higher capital costs for manufactoring firms, reduce their bank lending, lower their capital intensity and labor productivity, weaken firms’ financial performance, and reduce their TFP growth by economically significant magnitudes. This evidence highlights macroeconomic stability concerns associated with real estate booms.

Keywords: Factor price externalities; reverse Balassa-Samuelson-effect; firm growth (search for similar items in EconPapers)
JEL-codes: D22 D24 R31 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2018-05, Revised 2018-05
New Economics Papers: this item is included in nep-cna, nep-tra and nep-ure
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1838

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