The Effect of Home Equity on the Risky Financial Portfolio Choice of Chinese Households

Using a large and unique household level dataset, we examine the effect of home equity appreciation during the housing boom on shareholdings of risky financial assets that include stocks, funds, bonds, and wealth management products. We address potential endogenous problems by employing two instrumental variables. The 2SLS estimates suggest that a 10% increase in home equity level leads Chinese households to raise the share of total risky financial assets by 0.6 percentage points. Conversely, a 10% increase in housing share crowds out the share of total risky assets by 2.5 percentage points, which is greater than the magnitude of home equity effect. Our results further show heterogeneous effects of home equity across city tiers and household characteristics, which offers an important policy implication.