Financial markets, real estate, and local government finance in China: a macro-risk perspective

Abstract

This thesis comprises three studies on the Chinese economy, focusing on DSGE modelling of its macro-financial linkages and empirical analysis of its commodity markets.

The first study develops a Dynamic Stochastic General Equilibrium (DSGE) model to investigate the interplay between local government land finance and monetary policy in the Chinese real estate market. It reveals a positive feedback loop where land sales by local governments facilitate bank credit expansion, while monetary easing boosts land values, creating a powerful financial accelerator that amplifies housing market fluctuations. A key contribution is endogenously modeling this interaction, which has been treated separately in prior literature.

The second study extends this analysis to an open economy, examining the structural shift in China’s monetary policy regime around 2014. By constructing and comparing two distinct DSGE models for the pre- and post-2014 periods, the study demonstrates a fundamental change in shock transmission. Before 2014, macroeconomic fluctuations were predominantly driven by productivity shocks transmitted through foreign exchange reserve accumulation. After 2014, domestic monetary policy shocks, transmitted via innovative policy tools, became the dominant driver, altering the economy’s vulnerabilities.

The third study provides an empirical analysis of volatility in China’s commodity markets. Using a GARCH-MIDAS framework, it disentangles the impacts of macroeconomic versus financial uncertainty and domestic (China) versus foreign (U.S.) sources. The findings indicate that all examined forms of uncertainty are significant, priced-in risk factors. Notably, U.S. financial uncertainty emerges as the most powerful predictor of volatility for Chinese metal and energy futures, highlighting significant cross-border financial spillovers.

Collectively, these studies offer new insights into the unique financial accelerator mechanisms in China’s property market, the profound consequences of its monetary policy evolution, and the complex drivers of volatility in its commodity markets.

Date of Award	15 Oct 2025
Original language	English
Awarding Institution	University of Nottingham
Supervisor	Bruno Deschamps (Supervisor) & Paolo Bianchi (Supervisor)