Spillover Effect of China’s Real Estate Market on the Banking Industry’s Systemic Risks, a paper co-authored by our school’s Associate Professor Fang Yi, Associate Professor Jing Zhongbo and 2018 graduate student Ma Xiao from CUFE’s School of Management Science and Engineering, has been accepted by China Economic Quarterly.

General Secretary Xi Jinping pointed out in the reports of the 19th National Congress of the CPC that “We shall adhere to the positioning that houses are for living in, not for speculating with”, pinpointing the future development direction for China’s real estate industry which has been booming for two decades. Starting from 30 September 2016, a raft of unprecedentedly rigorous and all-round policies designed to regulate and control the real estate market were launched both by the central and local governments. This signaled the beginning of a stage of deep corrections for the domestic real estate market. The overall regulation of the market has achieved phased effects in the last two years. Meanwhile, we need to put more emphasis on how to effectively prevent and mitigate the spillover effect of a cooling domestic real estate market on systemic financial risks.

This paper aims to build an analysis framework on which to integrate studies on the risks of the real estate market, relations between the market and banks, and correlation among banking institutions, take into account the spillover effect of the real estate market on the banking industry’s systemic risks, and analyze the spillover channels. Specifically, this paper has mainly made the following contributions.

First, analyze and summarize the spillover transmission mechanism from the real estate market to the banking sector’s systemic risks based on relevant theories. Specifically speaking, the spillover effect of the real estate market on the systemic risks of the banking industry includes the following three aspects: direct spillover, indirect spillover and associated spillover. The paper further defines the direct negative impact of the real estate market’s risks on the banking system as direct spillover effect, the risk spillovers indirectly caused to the banking system as a result of the real estate market changing individual institutions as indirect spillover effect, and the influence of such market on the correlation between individual institutions and the banking system as associated spillover effect. Therefore, this section systematically looks into the spillover mechanism of the real estate market on the banking sector’s systemic risks through factorization, and seeks to help policymakers better prevent and mitigate the systemic risks of the banking industry brought on by the risks of the real estate market while deepening theoretical research.

Second, comprehensively analyze the formation mechanism of risk spillovers from the real estate market at different sources of risk. The paper first uses the comprehensive national real estate climate index as the basic data for real estate market risks to portray the risk spillover mechanism of the market. Then, with housing prices and loans as the research subject, it discusses the spillover effect of the market’s different sources of risk on the banking industry’s systemic risks, and analyzes the risk spillover mechanism of the real estate market to banks in a deeper and more comprehensive manner. The research finds that the net spillover effect of the national real estate climate index is the greatest, followed by housing prices and housing loans, even with the phenomenon of alternating between positive and negative spillovers.

Third, study the heterogeneity of spillover effects of different types of real estate markets on the banking sector’s systemic risks. The paper also deals with the heterogeneous characteristics of spillover effects on the banking sector’s systemic risks due to price volatility of newly built commodity housing in different types of real estate markets. It is found through research that real estate markets in tier-2 cities are crucial for risk spillovers to banks, followed by those in tier-1 and tier-3 cities, which can serve as references for the regulation and control of the real estate market as a whole.