On the Imbalances between the Real Estate Market and Stock Markets in China

Abstract

This paper explores the imbalance between China’s real estate market, which is booming, and the stock market, which has plunged over four years. Our empirical analysis shows that the two markets are systematically negatively related due to fund flows. The plummeting stock indexes are partly caused by the surge of property market. In the meantime, the stock composite index is found to be significant in explaining housing price movements, which are also affected by inflation rate and hot money inflows. Policy measures redirecting influx of funds from the housing market to stock markets will help structural adjustment in stock markets, which is one of nation’s key tasks.

Keywords: China, Real estate market, stock market, granger-causality, financial development

JEL Classification: G14, G28, F30