The Spillover Effects of Real Estate

We examine the spillover effects of the “Three-Red Lines” policy, a Chinese regulatory measure in 2020 that imposed leverage reduction requirements on the real estate sector. Using a firm-level exposure measure, we find that higher exposure to the real estate sector leads to more pronounced adverse impacts on firms’ financing costs and real economic activities. Moreover, these spillover effects transmit through the production network, affecting both upstream and downstream sectors closely connected to real estate. Notably, trade credit plays a significant role in explaining these observed spillover effects.