Structural Changes in the Relationship between Foreign Direct Investments and China’s Housing Price Bubble

Abstract

Since 2006, China has issued a series of policies to regulate foreign investments (FI) in the attempt to control housing prices. In the present study, the association between foreign direct investments (FDI) and China’s housing price bubble (HPB) was examined to elucidate the rationality of foreign investment controls. Structural changes in the influence of FDI on China’s HPB were observed. FDI and China’s HPB exhibited an increased association between 1985 and 2015, particularly following Q3 of 1997. This may have resulted from the relative stability of the Renminbi during the Asian Financial Crises, which attracted an increased inflow of FDI to China, and consequently aggravated China’s HPB. A threshold regression model was employed to uncover the reasons for the structural changes exhibited in the influence of FDI on China’s HPB. Findings indicated that FDI only influenced China’s HPB during the Renminbi appreciation, and that increased FDI was not correlated to HPB during the Renminbi depreciation or when the value of Renminbi remained unchanged against the U.S. dollar. The empirical results obtained in the present study suggest that the Chinese government should first observe changes in the exchange market prior to controlling the housing market.