China’s Economic Growth: Past, Present and Future
ECON 6470 Economic Growth and Development: Spring Case Study 2015
Professor Dr. Darryl McLeod
Presented By:
Chuan Shi, Ph.D. Economics Candidate 2016
1
Introduction: China Progression through comparative peers
 Stage I – Initial Growth Phase & Absolute Convergence

Fiscal, monetary & socioeconomic reform measures

Historic political & institutional landscape

Reform implementation

TFP:
- Regional cooperatives (Township & Village Enterprises)
- Infrastructure
- SEZ’s
- FDI & trade liberalization (export-reliance model)
2
Growth Factor Analysis – Steady State (Absolute Convergence)
Compute steady state y* assuming the country has:
Jones Chapter 3 Exercise 1-- Where are these economies headed? Page 75
To add ctys:
Y^97
A^90
sk ^
X^
USA
Singapore
1.000 0.204 11.900 0.010 0.085 1.000
0.895 0.348 11.900 6.72 6.795 1.078
India
0.102 0.143 4.52 1.980% 0.095 0.267
Brazil
China
0.298 0.165 4.45 1.740% 0.092 0.758
0.097 0.235 6.110 0.013 0.088 0.106
South Africa
0.227 0.151 6.03 2.280% 0.098 0.460
1.000
1.706
0.701
0.809
1.152
0.740
1.000
79.941
1.115
1.087
1.038
1.151
sk
u
n
x
a. own TFP (A)
b U.S. TFP (A) c. U.S. schooling-- u d. U.S. savings rate
h^ (sk^/x^) y*(a)
y*/y97
y*(b)
y*/y97
y*(c)
y*/y97
y*(d)
y*/y97
1.00
1.00
0.48
0.47
0.56
0.56
1.00
0.16
0.10
0.31
0.65
0.90
1.000
0.147
0.379
0.410
0.590
0.446
1.00
0.16
3.72
1.37
6.09
1.97
1.000
0.158
0.212
0.654
0.112
0.369
1.00
0.18
2.08
2.19
1.15
1.63
1.00
1.00
1.08
1.20
0.13
1.25
0.36
1.21
0.06
0.61
0.26
1.13
1.000
0.147
0.793
0.863
1.054
0.802
1.000
0.158
0.101
0.310
0.063
0.205
 Peer countries include BRICS, except for Russia (no data is available), Singapore and US as
the base countries to compare
 Among peer economies, China had the lowest GDP 0.097 in 1997 comparing to the USA’s GDP
as 1
 According to absolute convergence, China should have grown the fastest amongst peer
countries
 Using its own TFP (A) from 1990, China has 0.063 as steady state GDP, which is less than
0.097 GPD level of 1997. If China used its TFP level in 1990, it’d not grow during the 90’s.
3
Fiscal, monetary & socioeconomic reform measures1
 Fiscal Reform

Collative farming system to household-responsibility system: increased TFP in
agricultural sectors

Encourage private companies and non-state sectors to grow: increase TFP in nonagricultural sectors

Special Economic Zones
 Monetary

Fixed exchange rate

High interest rate to encourage savings
 Socioeconomic

Trade liberalization
4
Historic political & institutional landscape
 After the death of Mao Zedong, cultural revolution ended. Deng XiaoPing came into
power and began the policy of “reform and opening up”
 Special Economic Zones
 Foreign Direct Investment
 Trade Liberalization
5
TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization
(export reliance model)
 China’s overall TFP decreased in 2006-10
partially due to the decrease in capital
input (ICT). Brazil, Russia, India, and
South Africa, increased capital input
(ICT) during this period
 China increased capital input (non-ICT) in
the period of 2006-10, which was a trend
among all the peer economies
 India increased TFP between 2006-10,
while Russia had the deepest reduction in
TFP
Source:
6
TFP: Regional cooperatives, infrastructure, SEZ’s, FDI & trade liberalization
(export reliance model)
Source: Zhu, 2012, pg. 18
Source: Reuters, Goldman Sachs
7
Introduction: China Progression through comparative peers
 Stage II – Intermediary Structural Transition Phase to Conditional Convergence

End of export reliant growth; Beginning of fiscal reallocation

SOE reform & new industry champions for higher value-added growth

Socioeconomic reform: social safety net creation

TFP:
- Population growth
- Savings
- “New normal”
8
Growth Factor Analysis – Steady State (Conditional Convergence)
Compute steady state y* assuming the country has:
Jones Chapter 3 Exercise 1-- Where are these economies headed? Page 75
To add ctys:
Y^97
A^90
sk ^
X^
USA
Singapore
1.000 0.204 11.900 0.010 0.085 1.000
0.895 0.348 11.900 6.72 6.795 1.078
India
0.102 0.143 4.52 1.980% 0.095 0.267
Brazil
China
0.298 0.165 4.45 1.740% 0.092 0.758
0.097 0.235 6.110 0.013 0.088 0.106
South Africa
0.227 0.151 6.03 2.280% 0.098 0.460
1.000
1.706
0.701
0.809
1.152
0.740
1.000
79.941
1.115
1.087
1.038
1.151
sk
u
n
x
a. own TFP (A)
b U.S. TFP (A) c. U.S. schooling-- u d. U.S. savings rate
h^ (sk^/x^) y*(a)
y*/y97
y*(b)
y*/y97
y*(c)
y*/y97
y*(d)
y*/y97
1.00
1.00
0.48
0.47
0.56
0.56
1.00
0.16
0.10
0.31
0.65
0.90
1.000
0.147
0.379
0.410
0.590
0.446
1.00
0.16
3.72
1.37
6.09
1.97
1.000
0.158
0.212
0.654
0.112
0.369
1.00
0.18
2.08
2.19
1.15
1.63
1.00
1.00
1.08
1.20
0.13
1.25
0.36
1.21
0.06
0.61
0.26
1.13
1.000
0.147
0.793
0.863
1.054
0.802
1.000
0.158
0.101
0.310
0.063
0.205
 With US TFP to recalculate China’s steady state GDP, China has the highest growth as 6.09 among
all peer economies
 With US schooling u as 11.9, instead of China’s schooling as 6.11, China has higher growth than
that with its own schooling system
 With US saving rate n as 0.01, instead of China’s saving rate as 0.013, China has slower growth
than that with its own saving rate
 To conclude, China needs to improve its schooling and TFP in order to have higher conditional
convergence of growth
9
End of US export reliant growth
 Chinese Exports to US as % of Total Chinese Exports
Source: Zero Hedge, Bloomberg
10
SOE reform & new industry champions for higher value-added growth
 Private companies in China are gaining more profitable, while state owned enterprises (SOE’s) reinvest: SOE
consolidation and asset injection
Source: Bruegel, Egawa.
11
Socioeconomic reform: social safety net creation
Gross National Savings
60
50
40
30
20
10
0
Brazil
China
India
Singapore
South Africa
United States
Source: IMF WEO 2014
Source: IMF WEO 2014

China has the highest national savings among peer
economies partially due to inefficient social safety
net

China has relatively low government expenditure
in comparison to peer countries. To increase
social safety net, government will need to
continue to increase expenditure
12
TFP: From population growth & savings to “new normal”
 …
Source: NBS,CITIC-CLSA
Source: United Nations
13
Introduction: China Progression through comparative peers
 Stage III – Future Steady State Growth Rate Normalization

TFP:
- Consumption
- Education
- Technology
- Institutional expansion

Positive growth incidence curve

Negative growth incidence curve
14
TFP: Consumption, education, technology & regional & institutional
expansion
 China will transition to domestic consumption; India to export-led; Brazil & Russia regress and continue
commodity dependency due to institutional erosion
 Technology, innovation and highly skilled labor key to conditional convergence for China; Infrastructure and
basic education for India
Patent Applications, resident
800000
700000
600000
500000
400000
300000
200000
100000
0
1990
China’s consumption has not increased proportionally to GDP
growth. Simulating domestic consumption will contribute to
economic growth
2005
2006
2007
2008
2009
2010
2011
China
Singapore
South Africa
United States
India
Brazil
2012
2013
Source: World Development Indicators, World Bank
Source: Goldman Sachs

2000

China had only 5,832 patent applications in 1990, while the
United States had 90,634. China had 704,936 patent
applications in 2013, while the United States had 287,831.
China’s education and technology has positively contributed
to TFP growth
15
Positive growth incidence curve
 Sustainable reforms (albeit slower than
expected)


China – clean energy
Less pollution
 Economic transformation plan

India – Infrastructure investment /
favorable Gini curve impact
 Institutional regional and global
transformation

AIIB – Asian Investment
Infrastructure Bank (China): Global
liquidity & risk reduction

Regional Co-integration
Source: US News
16
Negative growth incidence curve

Pollution: Kuznet Curve impact from rising pollution may impact growth for India & China

How much growth will be sacrificed for better health in India & China?

Russian – Geopolitical tensions; Brazil – Lack of fiscal austerity and inflation;

Corruption
Source: http://g.foolcdn.com/editorial/images/26223/kuznets-curvechina_032213_large.png, Kuznets
17
Negative growth incidence curve (cont.)

Aging Population: China & Russia face major Gini deficiency in working age population

Will India emerge as the dominant force of global growth?
18
Conclusions
 High TPF growth due to education and science, and economic system
improvement
 Domestic consumption needs to further grow
 Inequality has increased
 Social safety net is needed to address inequality and domestic consumption
19
Sources
1.
Zhu, Xiaodong. “Understanding China’s Growth: Past, Present, and Future”. Journal of Economic Perspectives, Volume 26, Fall 2012, page 103-124.
http://homes.chass.utoronto.ca/~xzhu/paper/JEP2012.pdf
2.
Rodrik, Dani. “What’s So Special About China’s Exports” . Jan 2006,, Harvard University. https://www.sss.ias.edu/files/pdfs/Rodrik/Research/Whats-special-China-exports.pdf
3.
IMF World Economic Outlook (WEO) update: http://www.imf.org/external/pubs/ft/weo/2015/update/01/
4.
World Development Indicators (World Bank ): http://data.worldbank.org/data-catalog/world-development-indicators
5.
Egawa, Akio Decoded BRIC, “The Old emerging economies and their “new” attractiveness as the centre of consumption power”, 8 th January 2014:
http://g.foolcdn.com/editorial/images/26223/kuznets-curve-china_032213_large.png
6.
UNCTAD, World Investment Report, 2012, http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx
7. Durden, Tyler, “Watch Out For Falling Objects: US Share Of Total Chinese Exports Plunges To All Time Low “, 9/2013, http://www.zerohedge.com/news/2013-03-09/watch-out-fallingobjects-us-share-total-chinese-exports-plunges-all-time-low
8. Keohane, David,” SOE this is what passes for reform”, /2014 http://ftalphaville.ft.com/2014/04/14/1828032/soe-this-is-what-passes-for-reform/
9. Murphy, David – Zhang, Nancy – Zhang, Xiao, “ Mr. & Mrs. China dare to dream”, CITIC/CLSA, 2013 (Unpublished Bank Research)
10. UN Population Division Database: http://www.un.org/en/development/desa/population/theme/trends/index.shtml
11. Goldman Sachs Report, Global Sherpa, ”Globalization, Sustainable Development and Social Impact in World Rankings, Countries and Cities”, http://www.globalsherpa.org/briccountries-brics
12. Magill, Bobby, “ World’s Most Polluting County Leads in Clean Energy Investment”, 2014, Bloomberg http://www.bloomberg.com/news/2014-04-04/world-s-most-polluting-countryleads-in-clean-energy-investment.html
13. Kuznets, Simon, “Economic Growth and Income Inequality”, The American Economic Review, March – 1955, Vol. XLV.
20
14. Scrutinio, Vincenzo, “ A Gray Future for the BRIC’s, 2013, http://www.openpop.org/?p=661