Beyond the collateral channel: Real estate prices and manufacturing firm investment in China

Summary

Recent studies show that real estate price appreciation raises firms’ debt capacity and therefore investment. However, appreciation of real estate prices may also push up production costs and thus discourage investment incentives. Using a large panel data set of Chinese manufacturing firms, we document that local real estate price appreciation had significant and robust negative effects on firm investment. The size of the negative effect is economically large, with a one standard deviation change in real estate prices explaining 17% of the variation in firm investment. Further exploration reveals that such negative effects of real estate prices on investment are stronger for firms in labor intensive sectors.