Study On Stable Relations Between China's Real Estate Development And Financial Market

In recent years, as the development of China's real estate and deepening of financial reform, China's real estate and financial sectors play an increasingly vital role in national economy. The recent U.S. subprime mortgage crisis which has shocked the global economy reveals that to promote a rational development of real estate, to prevent financial risks and to maintain the stabilization between the development of real estate and financial markets are of great realistic significances.This article contains five parts: the first part is an introduction, and the second part is a review on contemporary relevant theories and researches. The third part discusses the mechanism between our real estate and financial market from both micro and macro perspectives, and then studies the status quo of the two perspectives based on specific data which provides a basis for empirical analysis. The fourth part is an empirical study of China real estate and financial markets. This paper divides the financial markets into two parts, namely money markets and capital markets, supported by the reflection indicators such as interbank interest rates, financial institutions, short-term loans, long term loans, stock market capitalization and applies the investment in real estate as a indicator of real estate development into it. Moreover, this part adopts the monthly data from 2004 to 2009 to carry out unit root test, cointegration test, and granger causality test based on which the error vector correction model is created, the impulse response function is analyzed. Finally, the last part will put forward some countermeasures.Through theoretical and empirical analysis, this paper comes to the following conclusions: Firstly, the huge potential demands released from China's economic growth and the housing reform contradicts the rigid supply of real estate and the features of structure in monopolistic market. Under this circumstance, there is a long-term equilibrium relationship between our real estate and financial markets coupled with financial support, credit expansion and financial innovation. Specifically, long-term loans, short-term loans, and M2 show positive effects on real estate investments in a 0.13, 0.08 and 0.06 respectively, with a two-way causality between them. Furthermore, owing to the substitution effect, the stock market reflects a negative correlation with the real estate industry in the long term with the stock market being a reason for its changes, however, it is not applicable in reverse. Secondly, after experiencing the short-term shocks, China's real estate and financial markets need another three years to return to balance. Real estate investment will keep positive response after 5 months when it's impacted by long-term loans, short-term loans and M2.Meanwhile, long-term loans, short-term loans and M2 will need two years to show positive response when they are impacted by real estate investment. Besides, the financial markets will face a huge potential risk when real estate investment continue to present a positive development in a short run. Thirdly, it is not likely to cause large-scale financial market turbulence due to the facts that China's financial market is not fully open, the development of stock market is still limited, derivative financial instruments develop slowly and housing loan is not securitized. Additionally, the investment of foreign economic entities in China will push China's real estate finance market to encounter a greater risk from the international financial markets. Therefore, our real estate will definitely form a closer relationship with financial sector in the future. Thus our suggestions: to guide real estate industry to develop reasonably; to balance supply and demand; to regulate the credit system; to broaden the financing channels of real estate; and to establish monitoring system towards housing real estate market.