How do housing purchase limits affect firm default risks in Mainland China?

Alfred Wong, David Leung and Calvin Ng
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Alfred Wong: Hong Kong Monetary Authority
David Leung: Hong Kong Monetary Authority
Calvin Ng: Hong Kong Monetary Authority

No 172016, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The rapid rise in the price of housing in Mainland China in the past decade raised concerns over the potential risks to the economy, leading to the implementation of a policy that placed a limit on housing purchases in many cities in 2010 and 2011. This paper, by using the difference-in-difference method, investigates the effect of the policy on firm default risks. It shows that the impact of housing purchase limits is not homogeneous across cities. While the policy has significantly lowered firm default risks in big cities (especially those cities caught in the first two rounds of policy implementation), it is ineffective in relatively small cities and, in some cases, even caused firm default risks to rise. Furthermore, the effectiveness of the purchase limit on firm default risks becomes weaker when sectors those firms belong to have limited links to the real estate sector. While the purchase limit focuses on default risks arising from the demand side, the risk arising from the housing supply side remains under the current fiscal system and land sales mechanism. Therefore, the housing purchasing limit should be supplemented by fiscal reforms that could mitigate land price increase and hence lower default risks in the long run.

Keywords: Purchase Limit; Real Estate; Default Risk; Difference in Difference (search for similar items in EconPapers)
JEL-codes: C23 G32 R38 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-09
New Economics Papers: this item is included in nep-cna, nep-tra and nep-ure
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