Exogenous Shocks，Real Estate Prices and Enterprise Investment

Abstract

Since the outbreak of the Global Financial Crisis in 2008, the evolutions of real estate prices and enterprise investment have become the important features of China’s economy. According to the National Bureau of Statistics in China, during the period from 2009 to 2016, the growth rate of China’s fixed asset investment takes a downward trend. The growth rate of the investment in 2009 was as high as 30.1%, while in 2016, it was only 7.9%. However, during the same period, the growth rate of real estate prices showed a V”shape. From 2009 to 2013, the growth rate of commercial housing in China was stable at 7.5%, and during the period from 2014 to 2016, the growth rate of housing prices rose rapidly from 1.4% to 10.1%. According to the data released by the People’s Bank of China, 45.6% of the new loans in 2016 were related to real estate loans and the issue of transforming the economy from real to fictitious was widely discussed in various circles. Along with the government’s continued macroeconomic regulation measures of the real estate market, the current slowdown in enterprise investment growth and the sharp rise in real estate prices have eased, but the sources of this problem have not been completely eliminated, such as housing prices rising from the first and second tier cities to the third and fourth tier cities. Physical investment, especially private investment growth is still not optimistic. In view of this, a clear understanding of the intrinsic link between real estate prices and enterprise investment is of great significance for preventing and defusing China’s systemic financial risks and introducing more effective macroeconomic regulation policies. Based on the stylized facts of China’s economic running since 2008, this paper constructs a New Keynesian Dynamic Stochastic General Equilibrium model with enterprises’ Balance Sheet Recession” mechanism, focusing on exploring how the features of the housing rigid demand and enterprises’weak foreign demand influence the relationship between enterprise investment and real estate prices. The results show that: First, the positive shock of the housing preference which origins from the rigid housing demand crowds in the real investment by a small margin while increasing housing prices. Second, the negative shock of the enterprise balance sheet, stemming from the weak foreign demand, decreases enterprise investment through the mechanisms of Financing Premium”and Balance Sheet Recession”, which causes the surplus funds to shift to the real estate market and then pushes up housing prices. Further, through the multiple scenario analysis of different tax burdens in enterprises, the research finds that confronted with the negative shock of the enterprise balance sheet, the lower corporate taxes can help to stimulate enterprise investment, and alleviate the phenomenon that the funds transfer from the real economy to the virtual economy. The main contributions of this paper are reflected in three aspects. First, in theory, this paper pays attention to the transmission mechanism of the enterprise balance sheet, and introduces the theory of Balance Sheet Recession” into the New Keynesian Dynamic Stochastic General Equilibrium model. The current research in this area is very scarce. This study expands the theoretical research on the problem of the enterprise balance sheet. Second, from the perspective of research, this paper pays attention to the portrayal of the stylized facts of China’s economy, and focuses on the mechanism of the link between current real estate prices and enterprise investment, which plays an important role in the objective and comprehensive understanding of the relationship between the two. The third one is on the policy implication. In view of the different tax burdens of enterprises, this paper examines the effects of both shocks from housing preference and the enterprise balance sheet on the relationship between real estate prices and enterprise investment, which can provide a certain theoretical basis for the government decision-making departments to issue corresponding macro-control policies.