Can Money Flows Be Separated between Business and Housing? Evidence from China

Abstract

In recent years, China has encouraged the development of micro and small enterprises through inclusive finance, while it has tightened lendings to real estates. It is debatable whether monetary policy can be relaxed for one industry and tightened for another, concerning possible arbitrage. This paper examines possible false registrations of enterprises used for obtaining housing loans. In March 2017 and April 2018, the number of new small business registrations showed two periods of dramatic growth, along with the inclusive financing policies coupled with the tightening of housing loans. Using monthly city level data, we test the arbitrage hypothesis with a DID method. We find that the growth of small business registration is much higher in regions with higher demands for housing loans. The results are robust with alternative tests. We also show with individual level data that households with real business operations are not affected by the above policies.

Keywords: micro and small enterprises, housing loan, arbitrage, inclusive finance