Trends and Cycles in China's Macroeconomy

Chun Chang, Kaiji Chen, Daniel F. Waggoner, and Tao Zha

Working Paper 2015-5
June 2015

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We make four contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic research on China. Second, we document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. Fourth, the model's mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive Chinese characteristics. We argue that preferential credit policy for promoting heavy industries accounts for the unusual cyclical patterns as well as the post-1990s economic transition featured by the persistently rising investment rate, the declining labor income share, and a growing foreign surplus. The departure of our theoretical model from standard ones offers a constructive framework for studying China's modern macroeconomy.

JEL classification: E, F4, G1

Key words: reallocation, between-sector effect, total factor productivity growth, heavy versus light sectors, long-term versus short-term loans, labor share, lending frictions, incentive compatibility

Special thanks go to Marty Eichenbaum, Jonathan Parker, and Chris Sims for critical comments. The authors thank Toni Braun, Paco Buera, Gregory Chow, Larry Christiano, Xiang Deng, John Fernald, Lars Hansen, Rachel Ngai, Pat Higgins, Loukas Karabarbounis, Sergio Rebelo, Richard Rogerson, Pedro Silos, Aleh Tsyvinski, Harald Uhlig, Mark Watson, Kei-Mu Yi, Vivian Yue, Mei Zhu, Xiaodong Zhu, and seminar participants at People's Bank of China, Princeton University, the University of Chicago, the Federal Reserve Bank of Chicago, the 2014 European Economic Association & Econometric Society Summer Program, Beijing University, the 2014 Conference on "Macroeconomic Policies and Business Cycles" hosted by Shanghai Advanced Institute of Finance, the 2015 Bank of Canada and University of Toronto Conference on the Chinese Economy, George Washington University, Hong Kong University of Science and Technology, and Hong Kong Monetary Authority for helpful discussions. They also thank Shiyi Chen, Gary Jefferson, Kang Shi, and Jun Zhang for sharing their TFP calculations with them. Last but not least, they are deeply grateful to Pat Higgins, Hongwei Wu, Tong Xu, Jing Yu, and Karen Zhong for extensive research support. This research is also supported in part by the National Science Foundation grant SES 1127665 and the National Natural Science Foundation of China, project numbers 71473168 and 71473169. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the National Bureau of Economic Research. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Chun Chang, Shanghai Advanced Institute of Finance, Shanghai Jiaotong University, 211 Huaihai West Road, Shanghai, China 200030,; Kaiji Chen, Department of Economics, Emory University, Rich Memorial Building, 1602 Fishburne Drive, Atlanta, GA 30322-2240,; Daniel F. Waggoner, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470,; or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470,
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