Real Estate Regulation and Default Risk on Financial Lease Contracts

Xuefeng Mou and Shi Li

Emerging Markets Finance and Trade, 2024, vol. 60, issue 3, 617-630

Abstract: This paper investigates the impact of China’s regulatory restrictions on financing for real estate development enterprises on the default risk across the industry value chain. We estimate the policy’s treatment effect using unique data on contracts of financial leasing firms. Our findings indicate a reduction of 6.9% in the default probability of real estate-related leasing contracts, with shorter contract durations and smaller contracts a heightened susceptibility to the policy’s impact. These results provide valuable insight into how financial institutions serving the real estate sector can optimize their risk management strategies in response to regulatory policies. Furthermore, our study highlights the importance of a well-defined and quantifiable financing policy in effectively managing risk across the industry value chain in emerging markets.

Date: 2024
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DOI: 10.1080/1540496X.2023.2228464

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