Credit expansion and misallocation

In response to the global financial crisis in 2008, the Chinese government launched a 4-trillionyuan economic stimulus plan, which represented a typical episode of government intervention in the economy. This paper analyzed the impact of the stimulus plan, which mainly took the form of bank credit lines, on resource allocation and aggregate productivity. Using manufacturing data from 2001 to 2013, we showed empirically that it pulled up the total demand in the short term, but by extending excessive credit to weak firms, it created resource misallocation and over-capacity in the long term.