Previous research on the United States and Japan finds economically large impacts of changing real estate collateral value on firm investment. Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, we estimate investment equations that yield no evidence of a collateral channel effect. One reason for this stark difference appears to be that some of the most dominant firms in China are state-owned enterprises (SOEs) which are unconstrained in the sense that they do not need to rely on rising underlying property collateral values to obtain all the financing necessary to carry out their desired investment programs. However, we also find no collateral channel effect for non-SOEs when we perform our analysis on disaggregated sets of firms. Norms and regulation in the Chinese capital markets and banking sector can account for why there is no collateral channel effect operating among these firms. We caution that our results do not mean that there will be no negative fallout from a potential real estate bust on the Chinese economy. There are good reasons to believe there would be, just not through a standard collateral channel effect on firm investment.

In a world without complete contracting, economists long ago realized that pledging collateral such as owned real estate can allow firms to borrow more, and thus, to invest more (Barro (1976), Stiglitz and Weiss (1981) and Hart and Moore (1994)). Macroeconomists quickly realized the implication this insight had for amplifying the business cycle via a collateral channel effect (Bernanke and Gertler (1987); Kiyotaki and Moore (1997)). Falling asset values reduce the debt capacity of credit-constrained firms, which depresses their investment on the downside of the cycle. An analogous impact occurs on the upside of the cycle when collateral values are increasing for these firms. Empirically, recent research on the United States and Japan supports this theory and has shown that rises and declines in property values substantially amplify the volatility of investment by non-real estate firms (Chaney, et. al. (2012), Cvijanovic (2011), Gan (2007a, 2007b), and Lin, Wang and Zhu (2011)). That these effects are large economically is evident from Chaney, et. al.’s (2012) finding that a one standard deviation increase in underlying real estate collateral value is associated with over one-quarter of a standard deviation higher level of corporate investment. This implies about six cents added investment for every dollar increase in collateral value. Earlier research by Bernanke (1983) concludes that this factor helps account for the extraordinarily large variation in output during America’s Great Depression.