Capital Flows, Asset Prices, and the Real Economy: A &Quot;China Shock&Quot; in the U.S. Real Estate Market

60 Pages Posted: 16 Jul 2020 Last revised: 20 Jul 2020

See all articles by Zhimin Li

Zhimin Li

Peking University - HSBC Business School

Leslie Sheng Shen

Federal Reserve Banks - Federal Reserve Bank of Boston

Calvin Zhang

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: June, 2020

Abstract

We study the effects of foreign real estate capital flows on local asset prices and employment using detailed housing transactions data. We document (i) a "China shock" in the U.S. real estate market after 2007 driven by the Chinese government's house purchase restrictions and (ii) "home bias" in foreign Chinese housing purchases in the United States as they are concentrated in ZIP codes historically populated by ethnic Chinese. Exploiting the quasi-random temporal and spatial variation of real estate capital inflows from China, we find that foreign Chinese housing purchases have a positive and significant effect on local housing and labor markets. A one standard deviation increase in exposure to these purchases explains 24% and 18% of the cross-ZIP-code variation in local house prices and employment, respectively, with the employment effect transmitted through a housing net worth channel. We also show that these purchases drive out lower-income residents. Our results highlight the role of foreign real estate capital flows in both stimulating the real economy and inducing gentrification in local economies.

JEL Classification: E20, F61, J21, R21

Suggested Citation

Li, Zhimin and Shen, Leslie Sheng and Zhang, Calvin, Capital Flows, Asset Prices, and the Real Economy: A &Quot;China Shock&Quot; in the U.S. Real Estate Market (June, 2020). International Finance Discussion Paper No. 1286, Available at SSRN: https://ssrn.com/abstract=3648855 or http://dx.doi.org/10.17016/IFDP.2020.1286

Zhimin Li (Contact Author)

Peking University - HSBC Business School ( email )

HOME PAGE: http://zhimin-li.github.io

Leslie Sheng Shen

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

HOME PAGE: http://www.lsshen.com

Calvin Zhang

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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