The spillover effects of a downturn in China's real estate investment
The spillover effects of a downturn in China's real estate investment
Friday, 5 April 2013: 9:00 AM
Real estate investment accounts for a quarter of total fixed asset investment (FAI) in China.
The real estate sector’s extensive industrial and financial linkages make it a special type of
economic activity, especially where the credit creation process relies primarily on collateral,
like in China. As a result, the impact on economic activity of a collapse in real estate
investment in China—though a low-probability event—would be sizable, with large spillovers
to a number of China’s trading partners. Using a two-region factor-augmented vector
autoregression model that allows for interaction between China and the rest of the G20
economies, we find that a 1-percent decline in China’s real estate investment would shave
about 0.1 percent off China’s real GDP within the first year, with negative spillover impacts to
China’s G20 trading partners that would cause global output to decline by roughly 0.05 percent
from baseline. Japan, Korea, and Germany would be among the hardest hit. In that event,
commodity prices, especially metal prices, could fall by as much as 0.8–2.2 percent below
baseline one year after the shock.
The real estate sector’s extensive industrial and financial linkages make it a special type of
economic activity, especially where the credit creation process relies primarily on collateral,
like in China. As a result, the impact on economic activity of a collapse in real estate
investment in China—though a low-probability event—would be sizable, with large spillovers
to a number of China’s trading partners. Using a two-region factor-augmented vector
autoregression model that allows for interaction between China and the rest of the G20
economies, we find that a 1-percent decline in China’s real estate investment would shave
about 0.1 percent off China’s real GDP within the first year, with negative spillover impacts to
China’s G20 trading partners that would cause global output to decline by roughly 0.05 percent
from baseline. Japan, Korea, and Germany would be among the hardest hit. In that event,
commodity prices, especially metal prices, could fall by as much as 0.8–2.2 percent below
baseline one year after the shock.