This paper extends the existing studies of cyclical fiscal policy by providing the first systematic theoretical and empirical study of cyclical quasi‐fiscal investment of state‐owned enterprises (SOEs) in China. Using data from Chinese listed companies and the System GMM method, the results show that: (1) both central and local SOEs exhibit expansion‐biased investment behaviours; (2) the expansion‐biased investment of central SOEs mainly goes to the tertiary industry and the western regions of China, while the expansion‐biased investment of local SOEs mainly occurs in the tertiary industry and the middle and western regions of China; (3) during the economic recession, the higher the local growth targets, the more bank credit central and local SOEs can obtain, and the more pronounced the expansion‐biased investment. The study shows that apart from the countercyclical fiscal policy implemented by central and local governments, the quasi‐fiscal function of central and local SOE investments is also key for the Chinese economy to quickly recover from recessions.

Total factor productivity (TFP) is the driving force for the development of enterprises and a source of macroeconomic growth (