The US-China Trade War: Quantify the Negative Shocks to Local Housing Markets and Land-Based Finance in Chinese Cities

30 Pages Posted: 24 Aug 2023 Last revised: 29 Aug 2023

See all articles by Boning Li

Boning Li

Beijing Wuzi University

Wen-Chi Liao

NUS Business School, National University of Singapore

Weizeng Sun

Central University of Finance and Economics (CUFE) - School of Economics

Yongxuan Zeng

Central University of Finance and Economics (CUFE)

Siqi Zheng

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate

Date Written: August 23, 2023

Abstract

China’s real estate market has experienced two decades of “golden age” with soaring housing prices ever since the housing marketization. Tax-sharing and land reforms eventually made city governments heavily rely on land sales (state-land use-right transfers) to generate fiscal revenues for expenditures; the so-called “land-based finance” or “land finance” sustained through self-fulfilling prophecy of housing price and land value appreciations supported by fast urbanization and economic growth. The US-China trade war started in 2018 and caused a drastically negative and exogenous shock to this feedback loop in Chinese cities, however. This paper studies the trade war’s impacts on local housing markets and land-based finance. It constructs a shift-share measure transmitting the macro tariff changes to cityspecific heterogenous negative shocks. Analyses apply prefecture-city data spanning 2016-2019 and show that the tariffs were destructive to local housing markets and land finance besides hitting production. When cities experienced an extra percentage point (pp) of the weighted average tariff rate, transacted housing dropped by 3% and the prices fell by 1.2%, all else equal. The housing market tumbles deterred developers from buying state lands. The extra pp of the tariffs thus decreased the city government’s land-sale revenues by 7.6%. As Chinese cities faced, on average, a 1.62 pp increase in the average tariffs and, at the extreme, a 10.4 pp change within a year upon the trade war, impacts were substantial in hitting local housing markets and draining local public finance. Land-sale revenue declines between 12% to 79% were not uncommon. Further analysis reveals the more resilient cities in this trade-war were those with less severe overbuilding aka ghost-town phenomenon, a more diversified industrial base or export destinations, or a stronger tertiary sector. Overall, the US-China trade war could have more adversely impacted housing markets and local public finance in smaller cities than in big cities.

Keywords: Urban resilience, trade war, tariff, housing market, land finance, fiscal revenues

JEL Classification: F13, R31, H71

Suggested Citation

Li, Boning and Liao, Wen-Chi and Sun, Weizeng and Zeng, Yongxuan and Zheng, Siqi, The US-China Trade War: Quantify the Negative Shocks to Local Housing Markets and Land-Based Finance in Chinese Cities (August 23, 2023). MIT Center for Real Estate Research Paper No. 23/17, Available at SSRN: https://ssrn.com/abstract=4549794 or http://dx.doi.org/10.2139/ssrn.4549794

Boning Li

Beijing Wuzi University ( email )

Chaoyang North Rd
Tongzhou, Beijing
China

Wen-Chi Liao (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu.sg/faculty-details/?profId=663

Weizeng Sun

Central University of Finance and Economics (CUFE) - School of Economics ( email )

Beijing
China

Yongxuan Zeng

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Siqi Zheng

Samuel Talk Lee Professor of Urban and Real Estate Sustainability, Faculty Director of MIT Center for Real Estate ( email )

Building 9-323
Cambridge, MA 02139
United States

HOME PAGE: http://https://siqizheng.mit.edu/

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