The apparent absence of a real estate collateral channel for firm investment in China
presents a major puzzle in corporate finance. This paper provides a new explanation
by revealing profound heterogeneity linked to firm ownership. We find that for State-
Owned Enterprises (SOEs), rising real estate values do lead to a significant increase
in borrowing, demonstrating the financing part of the channel is active. Critically,
however, this credit expansion does not translate into higher real investment. For non-
SOEs, the channel appears inactive for both borrowing and investment. Our results
show that the aggregate null finding on investment in prior work is not due to an
inactive channel, but a dysfunctional one, where soft budget constraints for SOEs sever
the link between financing and productive activity, leading to capital misallocation.