The Formation Mechanism Of Financial Risk Of Real Estate In China

Real estate is a capital-intensive industry. A sum of money flows into real estate from commercial bank in China, which leads to a lot of financial risk. The primary purpose of this paper is to describe and analyze the logical process of the financial risk on commercial bank from microeconomic factors and macroeconomic factors as well.This paper studies four different aspects of the microeconomic factors. Firstly, it works on the process that developers have the moral risk and chooses adverse selection strategy that they may cheat the loan to invest into the high-risk project to produce the financial risk. Secondly, it carried on a research on the breach of contract of buyers. The buyers can be divided into two types people who really need the houses and the speculators. The former may breach the contract for uncertain factors. Houses are fixed assets, which are lack of liquidity, and some uncertainty factors may occur to produce risk in auction. The speculators buy the houses because they expect that the price of the houses will rise, and they believe it will be profitable when the prices arrive to the level of expectation. Thus, it results in a bubble economy in the real estate and leads to the financial risk and even financial crisis. Thirdly,it analyzes the strategy of bank agency, and arrive to the conclusion that some defects lay in the management mechanism and the competition mechanism because the bank agencies may impair the benefit of the bank for their own benefit. At last, it concentrates on the competition between the banks. Because of profitable loan, a hot competition is existed and spurs the banks to adopt a series of preferential tactics. Thus the financial risk is expanded.This paper also focuses on three different lights of the macroeconomic factors. Firstly, it describes the effect of government policy on the real estates,usually include: Rate policy, tax policy and other measurement of administrative intervention. Secondly,it analyze the reason why the international capital flow produce the financial risk in China real estates. Finally, it discusses the effect of macroeconomic cycle on the financial risk of real estates.On the basis of the mechanism of financial risk, the factors and the underlying financial risk in the China real estates are summarized and the expectation to the future macroeconomic control is suggested. Finally, recommendations are made for reorganizing and improving the trust structure of China real estates.