Regional Heterogeneity, Monetary Shock, and Bank Lending: Evidence from Chinese Real Estate Market

This paper investigates whether the Chinese real estate price rise is a national monetary shock and driven mainly by monetary shocks, or is controlled by the regional governments and driven mainly by local bank lending activities. The paper attempts to reveal how the determinants on residential property prices differ from those of the commercial property prices. Using both cross-sectional OLS regression and dynamic GMM method, it shows that, historically, movements in Chinese house prices have strong regional heterogeneity, meaning that they have mainly been driven by the local (provincial or region-specific) components, rather than nation-wide components. In addition, the local income level is a strong candidate in explaining the housing price movements. The paper extends prior literature by shedding light on the current debate that increases in house prices in China reflect a national phenomenon, rather than a collection of “local bubbles”. In addition, the paper empirically addresses the role of monetary shock and bank lending activities in the Chinese real estate market.