China Did Stimulus the Wrong Way

When the Great Recession hit, China didn’t hesitate to open up the fiscal taps. But the fast-developing country also embraced another form of stimulus that was a bit different from what John Maynard Keynes had recommended -- it encouraged its banks to start lending a lot more. They lent money to corporations, local governments and a variety of private actors. Much of this lending was financed by the issuance of so-called wealth management products (WMPs) -- basically, high-interest loans made by Chinese households to a variety of bank-affiliated lenders.

A new paper by economists Viral Acharya, Jun Qian, and Zhishu Yang provides a lot of detail about what happened. In China, there are four really big banks owned by the central government -- Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China. When the aftershocks of the Great Recession threatened the economy in 2009-10, the Chinese government told its banks to lend more money, and they did so -- the increase in lending from the Big Four banks during those two years totaled about 7 trillion RMB, or $1 trillion.