Local Public Debt and Corporate Investment in Housing:Effect and Mechanism
In adhering to the new development philosophy and accelerating the establishment of a new pattern of devel-opment,safeguarding against systemic risks and maintaining sustainable healthy economic development is crucial for re-inforcing economic security and promoting high-quality economic growth.Local public debt and real estate risks cur-rently require heightened attention within China's domestic economic sphere,as they are intricately linked.Local public debt can augment real estate prices through capitalization effects,encouraging firms to enter real estate-related industries and hold property assets for capital gains.Such strategic and deliberate real estate asset allocation by firms certainly pre-sumes a perpetually booming housing market,rendering it inapplicable under conditions where real estate markets face corrections influenced by both economic shocks and regulatory policies.If driven solely by investment motives for asset preservation and appreciation,firms'real estate investment will display a high sensitivity to economic cycles.This paper has identified a robust positive correlation between local public debt and non-real estate firms'housing investment from 2007 to 2018,which cannot be explained by preservation and appreciation alone.The crux of the matter lies in the probability that firms'real estate holdings serve not only as asset investment but also as collateral for financing.When local government debt competes for credit resources,firms may feel compelled to use real estate as collateral in a more intense financing landscape.In contrast to proactive motives for asset investment,the intention to hold real estate as collateral often represents a strategic yet reactive measure in response to the constric-tion of credit by local government indebtedness.Firms choose to bear higher financing costs for housing investment pri-marily because real estate assets are required as collateral to access future financial leverage.Simultaneously,these invest-ments are the price to prevail in a competitive financing environment characterized by banks'reluctance to lend and their escalating credit standards.This study,utilizing data from listed companies between 2007 and 2018,examines the effect and mechanism of local public debt on firms'real estate investment.The findings are as follows.Firstly,the size of local public debt significantly pushes up the propensity of non-real estate firms to invest in real estate.Secondly,an expansion of local public debt dis-places available credit,thereby exacerbating the competition for funding amongst firms.Firms are compelled to amplify their real estate investment as a strategic move to secure enhanced collateral for improved financing terms.Thirdly,the impact of local public debt on firms'real estate investment is more concentrated in the post-growth period and in the manufacturing sector,which is the core sector of the real economy.Fourthly,the propensity of firms to accumulate prop-erty as collateral ties firms'investment and financing closely to fluctuating housing prices,leading to greater investment instability,which could potentially hinder consistent economic growth.Regarding current economic development in China,the conclusions drawn offer several insights.Firstly,the supervi-sion over local government debt must be intensified to prevent unauthorized interference by these authorities.As the per-missions for local governments to incur debt judiciously are liberalized,a balanced approach is essential to scale back the volume of municipal investment bonds both consistently and materially.Secondly,it is essential to propel the social credit system,diversifying firms'credence mechanisms.The considerable economic disturbances wrought by financial frictions are partly a dire consequence of the absence of a well-established social credit system.Hence,perfecting the social credit system through various channels is quintessential for unblocking the domestic economic cycle.Thirdly,it is necessary to manage the real estate market regulation adeptly and avoid drastic price swings.As China grapples with real estate regula-tion,juggling development and security is imperative,fostering beneficial finance and real estate cycles within the supply side,while attentively addressing firms'real estate demand to prevent detrimental economic downslides due to a real es-tate market downturn.
Local Public DebtCorporate Investment in HousingCredit CompetitionCollateral Effect
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