Land Factor,Credit And Real Estate:A Perspective Of Financial Cycle

After the 2008 global financial crisis,the research of financial cycle and its relationship with the economic cycle began to get the attention of the academia,mechanism of financial crisis and the ultra-loose policies taken outside the definition of the interpretation of the mainstream economic theory,the actual situation of economic development and the development direction of theoretical research will require financial factors into the macro economic cycle theory.Credit expansion and asset price rising are the main driving forces of the financial cycle(Borio,2012).The expansion of credit brings purchasing power and productivity,and the capital provided by credit enables investment and production to continue.A refundable credit can repay the principal and interest through the profits it creates,but if the credit cannot be repaid by the profits,it creates on its own.If it needs to borrow new money to return the old,the credit quality will decline and lead to debt problems.Credit expansion is often closely related to the price of mortgage assets.If a company cannot obtain new credit to repay debts,one has to sell assets in a large scale to repay debts,resulting in the decline of asset prices,which is often a sign of financial crisis.Minsky’s financial instability hypothesis(Minsky,1982,1986)analyzes the financing structure change leading to financial instability,and reveals the fact that the driving force of credit expansion has been transformed from the profit creation and accumulation to mortgage assets prices booming,which makes financing structure tend to be fragile,increases risk of the financial system,and eventually leads to the crisis.Due to the financing pattern dominated by bank credit in China,the relationship between credit expansion and asset price fluctuation is extremely close,especially under the condition of government monopoly of land supply.The real estate price is closely related to bank credit,both of which are the main factors in the development of China’s financial cycle.Local governments make land as the main mortgage assets,and obtain strong financial resources to develop the local economy by land finance and financial.This economy development model makes local government obtained plentiful and cheap credit resources to develop the local economy through the monopoly of land supply.On the other hand the model also leads to extravagant price of land and real estate and the unreasonable allocation of credit resources,the over concentration of economic resources to the real estate industry and financial industry,the unbalance of industry structure,the local government debt problems.This article illustrates the assets prices of China represented by real estate prices and the government driving credit expansion promote the procession of China’s financial cycle,integrated the Minsky’s financial cycle theory,China’s actual situation,through theoretical analysis,mathematical modeling and empirical measurement and other research methods.While the two factors create China’s economic booming,they also contribute to the financial instability.When the financial cycle downward stage,higher asset prices and credit make debt problems be concentrated outbreak,which has caused the risk of the financial crisis.By mathematical model,this paper deduces a mortgage assets price control department which has constant access to credit resources by ascending asset prices resulting in the financing structure imbalance,the process of financial risk.Althogh monetary authorities can reduced risk by conrtroling the interest rates,it leads to the risk of delay and cumulative.This paper through the analysis of the bandpass filter with Chinese short cycle and the cycle of private sector credit,government credit,housing price and land price and stock price,incorporated into the financial cycle index,and analyse the relationship between economic growth.The results show that the Chinese financial cycle is similar with other countries,but presents its own characteristics,in which the government credit and land prices has played much more.Finally,this paper argues that the cyclical fluctuations of credit and asset prices should be based on market participants’ expectations and spontaneous behavior.The excessive government intervention and measures of smoothing the volatility are not conducive to stable the fluctuations,which lead to the accumulation of risk and expand instead.On the contrary,it is necessary to the market to conceive and take risks,to straighten out the relationship between the financial cycle and economic cycle,to achieve the rational and effective allocation of resources.