Trends and Cycles in China’s Macroeconomy

Abstract. We make four contributions in this paper. First, we provide a core of macroe-conomic 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 mech-anism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive Chinese characteristics. We argue that a 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 de-parture of our theoretical model from standard ones offers a constructive framework for studying China’s modern macroeconomy. Date: June 20, 2015. Key words and phrases. Reallocation, between-sector effect, TFP growth, heavy vs. light sectors, long-term vs. short-term loans, labor share, lending frictions, incentive compatibility.