| 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. |