China's Housing Bubble, Infrastructure Investment, and Economic Growth Shenzhe Jiang, Jianjun Miao, and Yuzhe Zhang∗ January 4, 2021 Abstract China's housing prices have been growing rapidly over the past few decades, despite low growth in rents. We study the impact of housing bubbles on China's economy, based on the understanding that local governments use land-sale revenue to fuel infrastructure investment. We calibrate our model to the Chinese data over the period 2003-2013 and find that our cali- brated model can match the declining capital return and GDP growth, the average housing price growth, and the rising infrastructure to GDP ratio in the data. We conduct two counterfactual experiments to estimate the impact of a bubble collapse and a property tax. Keywords: Housing Bubble, Infrastructure, Economic Growth, Chinese Economy, Property Tax. JEL codes: O11, O16, O18, P24, R21, R31. ∗Jiang: Institute of New Structural Economics, Peking University, Beijing, China 100871. Email: shenzhe-
[email protected]. Miao: Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, USA. Email:
[email protected]. Zhang: Department of Economics, Texas A&M University, College Station, TX 77843, USA. Email:
[email protected]. We thank Pedro Bento, Kaiji Chen, Li Gan, Dennis Jansen, Guoqiang Tian, Anastasia Zervou, Sarah Zubairy, Xiaodong Zhu, and participants at the seminar in Texas A&M University and several conferences for helpful comments. 1 Introduction China implemented a series of market-oriented housing reforms in the 1990s. Since then, the Chinese real estate market has experienced a dramatic and long-lasting boom. This boom has an important impact on the Chinese macroeconomy.