Shadow Banking and the Property Market in China

This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2014, defining the “fundamentals” of housing prices with the Gordon dividend discount model, and using lagged rents, prices, real, nominal interest rates, and shadow banking activity as short term explanatory factors. We find that the cities tend to share long run fundamentals and adjust relatively quickly to deviations from the fundamentals; we do not find anything close to bubbles. We also find that house prices grow more rapidly with availability of shadow banking funds, which have grown rapidly. A policy implication for the Chinese government is to focus on regulatory monitoring in this funding sector.