[Relationship between Stock Market and Housing Market in China]

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Abstract

This paper explores the imbalance between China's real estate market, which is booming, and the stock market, which has plunged from the period of Jul-2000 to Jul-2008. The software used for the purpose of this research is eviews. 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.

Relationship between Stock Market and Housing Market in China

1. Introduction

The Chinese economic growth has been spectacular in the recent years. The gross domestic product (GDP) grew by over 9.3 percent a year on average from 1990 till now. At the same time, many issues and challenges are confronting China. There are enormous imbalances: between investment and consumption; between manufacturing and agriculture; and in a particularly striking way, between the stock market, which is plunging, and the real estate market, which is booming. In three years housing prices have rocketed in China by 68% (Woods and Smith, Jun-2008).

The irrational exuberance signifies to some experts that this is a bubble that will sooner or later burst. Riding on an opposite direction, the stock markets in China has slid all the way by more than four years and lost more than 50 percent of value in stock indices. Surprisingly, China's two stock exchanges (the Shanghai and Shenzhen stock exchanges) were Asia's worst performing markets despite a 9.5% GDP growth in 2004 (Silverman, Jun-2008). No doubt, the imbalances will hold China back from a more healthy financial and economic development. The elusive performance of stock markets may lead to large changes in credit growth, whereas the adjustment of overheated property market will cause a lot of uncertainties, both making a soft landing task of Chinese economy more challenging.

The healthy development of real estate markets and stock markets are two of the China's seven key tasks in Premier Wen Jiabao's Jun-2008 government report. The government is trying to 4 cool the property market with a tax on homes sold within two years, limits on borrowing and a small hike in interest rates. In the meantime, the government has adopted favorable policies one after another to rally the bearish stock markets, ...