Working Paper: NBER ID: w16871
Authors: Yongheng Deng; Randall Morck; Jing Wu; Bernard Yeung
Abstract: In the recent financial crisis, macroeconomic stimuli produced mixed results across developed economies. In contrast, China's stimulus boosted real GDP growth from an annualized 6.2% in the first quarter of 2009 trough to 11.9% in the first quarter of 2010. Amidst this phenomenal response, land auction and house prices in major cities soared. We argue that the speed and efficacy of China's stimulus derives from state control over its banking system and corporate sector. Beijing ordered state-owned banks to lend, and they lent. Beijing ordered centrally-controlled state-owned enterprises (SOEs) to invest, and they invested. However, our data show that much of this investment was highly leveraged purchases of real estate. Residential land auction prices in eight major cities rose about 100% in 2009, controlling for quality variation. Moreover, higher price rises occur these SOEs are more active buyers. We argue that these centrally-controlled SOEs overbid substantially, fueling a real estate bubble; and that China's seemingly highly effective macroeconomic stimulus package may well have induced costly resource misallocation.
Keywords: Monetary Policy; Fiscal Policy; State-Owned Enterprises; China; Housing Market
JEL Codes: E02; E52; G01; G21; G3; G38; P27; P34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Beijing's order to state-owned banks to increase lending (G21) | Increased investment by SOEs (H54) |
| Increased investment by SOEs (H54) | Contribution to housing bubble (R31) |
| SOEs overbidding on land (H13) | Increase in real land prices (R31) |
| Government policy (F68) | Real estate market dynamics (R31) |
| Stimulus package (E65) | Boost in real GDP growth (O49) |
| Stimulus package (E65) | Misallocation of resources (D61) |