On the Washington Post blog, Ezra Klein interviews Patrick Chovanec, associate professor at Tsinghua University’s School of Economics and Management:
EK: Let’s talk about China’s stimulus. A lot of people know that they flooded the market with more than 4 trillion yuan, but you say that’s not the half of it.
PC: In November of 2008, when China was first hit by the financial crisis and the began seeing exports drop off, the state council announced the $4 trillion stimulus plan. But there really wasn’t so much a plan as an announcement. The way these projects, and much more, were financed was a lending boom that took place throughout 2009. The banks in China lent $10 trillion RMB. The country’s total loan portfolio expanded by one-third in the course of one year. That really fueled the the growth you saw in China. And remember, it’s a state-owned banking system. So when the word went out, go forth and lend, that’s what they did.
But the lending actually became larger than they thought. Originally, they wanted $6 trillion in total lending that year. But they blew past that in a month. Then the regulatory commission raised the cap to $7.5 trillion. Then, by the end of June, they hit that, and they couldn’t stop lending because that was keeping the economy going. And that was the real stimulus that took place in China.
