Real Estate Booms and Misallocation of Capital in China

This paper analyzes how real estate shocks affect corporate investment in China. In addition to the widely documented collateral channel, we also uncover two other channels: the speculation channel—rapidly rising commercial land prices induce manufacturing and service firms to buy more commercial land, which is unrelated to their core businesses, and to reduce other investments and innovation activities; and the crowding out channel—in response to rising land prices, banks grant more credit to land-holding firms, crowding out financing to non-land-holding firms. Through both channels, a 100-percentage-point increase in land price leads to 2.1-3.8 percentage points of TFP losses due to misallocation of capital.