How Do Housing Purchase Limits Affect Firm Default Risks in Mainland China?

HKIMR Working Paper No.17/2016

46 Pages Posted: 21 Sep 2016

See all articles by Gaofeng Han

Gaofeng Han

Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Shilin Zheng

National School of Development Peking University

Date Written: September 20, 2016

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

JEL Classification: C23, G32, R38

Suggested Citation

Han, Gaofeng and Zheng, Shilin, How Do Housing Purchase Limits Affect Firm Default Risks in Mainland China? (September 20, 2016). HKIMR Working Paper No.17/2016, Available at SSRN: https://ssrn.com/abstract=2841172 or http://dx.doi.org/10.2139/ssrn.2841172

Gaofeng Han (Contact Author)

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

Shilin Zheng

National School of Development Peking University ( email )

No.5 Summer Palace road
Beijing 100871
China

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