The Spillover Effects of a Downturn in China's Real Estate Investment

25 Pages Posted: 30 Nov 2012

See all articles by Ashvin Ahuja

Ashvin Ahuja

International Monetary Fund (IMF)

Alla Myrvoda

International Monetary Fund (IMF)

Date Written: November 2012

Abstract

Real estate investment accounts for a quarter of total fixed asset investment (FAI) in China. The real estate sector's extensive industrial and financial linkages make it a special type of economic activity, especially where the credit creation process relies primarily on collateral, like in China. As a result, the impact on economic activity of a collapse in real estate investment in China ”though a low-probability event” would be sizable, with large spillovers to a number of China's trading partners. Using a two-region factor-augmented vector autoregression model that allows for interaction between China and the rest of the G20 economies, we find that a 1-percent decline in China's real estate investment would shave about 0.1 percent off China's real GDP within the first year, with negative spillover impacts to China's G20 trading partners that would cause global output to decline by roughly 0.05 percent from baseline. Japan, Korea, and Germany would be among the hardest hit. In that event, commodity prices, especially metal prices, could fall by as much as 0.8“2.2 percent below baseline one year after the shock.

Keywords: China, Investment, Real estate investment, Spillovers, FAVAR, real estate, real estate investment, bond, bond spread, stock market, bond spreads, financial stability, sovereign bond, bonds, bond yield, treasury bond, financial system, stock exchange, treasury bonds, benchmark government bond, government bond, stock market index, stock market indices, stock market indexes, property developers, real estate transaction, savings deposits, bond yields, stock exchange index, financial institutions, government bonds, residential real estate, financial sector, stock index

JEL Classification: E22, F62, O57

Suggested Citation

Ahuja, Ashvin and Myrvoda, Alla, The Spillover Effects of a Downturn in China's Real Estate Investment (November 2012). IMF Working Paper No. 12/266. Available at SSRN: https://ssrn.com/abstract=2183026

Ashvin Ahuja (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alla Myrvoda

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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