China?s monetary stimulation boosted real GDP growth from an annualized 6.2% in the first quarter of 2009 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 monetary policy 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. Our data show that much of this investment was highly leveraged purchases of real estate. Quality adjusted residential land auction prices in eight major cities roughly doubled in 2009; and rapid price rises occur where these SOEs are more active buyers. This episode mimics the credit channel for monetary policy, but actually entails internal transfers between arms of the government putting upward pressure on real estate prices.