Chinese Economic Growth And Bubbles

Over the last30years, China has experienced a rapid economic growth and undergone the particular economic transition process. In the literature of resource allocation, Chinese growth benefits from the process of reallocation actually. In a model with firm heterogeneity, the reallocation of labor and capital among firms with different level of productivity, raised the total productivity in the economy and promoted the economic growth. In the paper Growing like China, Song et al (2011) pointed out that in the manufacture industry, the high-productivity firms would outgrow low-productivity ones, progressively driving them out of the market. However, this model does not explain the situation after financial crisis in2008.This paper proposed that capital misallocation is the key point to solve Chinese growth puzzles. The misallocation in the capital market reflects the financial constraint or credit constraint in the firm-level productivity. Due to the constraint, small-and-medium enterprises (SMEs) have to raise funds by bubbles. The theory of Credit-driven asset bubbles was first brought forward by Prof. Miao and Prof. Wang (2013), which described the positive feedback loop mechanism of bubbles and corporate financing activities.In Chinese situation, it turns out that asset bubble is a composition of capital markets. Thanks to these bubbles, SMEs could raise enough funds in the fragmented capital markets, so as to invest the profitable projects and to increase the firm values. However, when the financial crisis burst out, the investors became pessimistic and lowered the expectation of SMEs, ruled out the bubbles and weakened the financing ability of SMEs. In that time, the distortion of capital market cannot be ignored anymore.There’re assets bubbles in Chinese economy, proved by highly fluctuating prices of stock market and housing market. The model with bubbles proved that the initial asset bubbles relaxed the financial constraint of SMEs, stimulated the growing of SMEs, and hence was helpful to economic growth. While growing fast, the bubbles were in a large scale in the equilibrium status, making the amount of the capital stock per capita may exceed golden-rule capital stock. It is highly possible and unpleasant that the economy would be in the dynamic-inefficient status eventually.In the end, we put forward some advice to make up for deficiencies in the capital markets. It is the financial liberalization that could solve the problem fundamentally.