Financial Institutions’ Lending and Real Estate Property Prices in China

The rapid increase of China’s property prices in recent years, especially in major municipalities, has drawn much attention and provoked intense debates on the existence of “inflationary property values.” Many believe that over-investment in the real estate sector should be blamed for the skyrocketing property prices in many municipalities. This study takes a slightly different angle by focusing on efficiency of capital allocation rather than total volume of investment. This chapter attempts to address the following question: Will efficiently allocated regional capital help hold off a potential housing price bubble? Our analysis finds a negative relationship between our proxy for loan efficiency and local property price. The finding, however, implies that when loan efficiency improves, local property price tends to be lower. Hence, effective lending policies and practices can reduce the level of “inflationary property value.”