Housing Price, Bank Lending and Monetary Policy in China

International economic crises show that housing price fluctuations have great impacts on financial stability and economic fluctuations in mature market economies. In order to find out whether there exists a two-way relationship between housing price and bank lending in such a transition economy as China, this paper estimates a vector error correction model using quarterly data from 1998 to 2008 in China. The conclusions are as follows. (I) In long-run there exit a cointegration relationship between housing price, GDP, interest rate and bank lending. (2) In short-term, housing price increases cause bank loans to expand which stimulates housing price to rise subsequently. There exist two-way Granger causality relationships between housing price and bank lending. (3) Innovations to housing prices have significant and persistent positive effects on bank lending which is similar to housing prices' responses to innovations to bank loans. This means housing price and credit are interdependent in China and housing market has played an important role in the transmission mechanism of monetary policy particularly through credit channel.