(), Randall Morck
(), Jing Wu
() and Bernard Yeung
Yongheng Deng: National University of Singapore, Postal: National University of Singapore, NUS Business School, Singapore 119613
Randall Morck: University of Alberta and NBER, Postal: Faculty of Business, University of Alberta, Edmonton, AB T6G 2R6, CANADA
Jing Wu: National University of Singapore and Tsinghua University, Postal: National University of Singapore, NUS Business School, Singapore 119613
Bernard Yeung: National University of Singapore, Postal: National University of Singapore, Mochtar Riady Building, 15 Kent Ridge Drive, BIZ 1, Level 6, #6-19, Singapore 119245
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.
63 pages, September 5, 2011
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