Real estate prices and firm borrowings: Micro evidence from China

- This paper studies collateral channel effect by utilizing a large firm-level dataset during the 2000-2007 period on Chinese firms.
- Real estate price appreciation can significantly increase firm's borrowing in China.
- We find that the collateral channel effect does not exist for SOEs (state-owned enterprises) but exists for non-SOEs.

Real estate price appreciation can lessen firm's financial constraint by increasing its collateral value. This paper studies this channel by utilizing a large firm-level dataset during the 2000-2007 period on Chinese firms. In contrast to Wu, Gyourko, and Deng (2015) that collateral channel effect in China does not exist either for firms overall or for private firms, we provide empirical evidence on the presence of collateral channel effect and show the effect is significant for private firms but not significant for state owned enterprises, whose behavior is more of political based. Further analysis shows that firms significantly change their debt structures in response to real estate price shocks.