Sources of Growth for the Chinese Economy

These notes draw on the recent research of economist Linda Yueh on the main growth drivers for the Chinese economy over recent years

China is going through a period of rapid structural reform and has continued to achieve fast growth helping to lift hundreds of millions of people out of extreme poverty. But this growth has also brought numerous challenges and problems for Chinese policy-makers.

Basics on Chinese Growth

• Real GDP growth in China - 9.6% pa growth since 1979
• 60-70% has come from increasing capital and labour inputs (input accumulation)
• 30-40% has come from rising total factor productivity growth (increasing efficiency)
• 1.Inputs: A lot of Chinese investment has been inefficient but 50% of Chinese growth has come from adding capital, 10-20% from adding workers - the natural population growth rate is slowing and women already had high rates of labour force participation before the late 1970s reforms. So there has been less scope for the feminization of the labour force. The one child policy has also had a dramatic effect on labour force growth which is one reason why it is being relaxed. The culture is for bigger families.
• 2.Productivity Growth: Looking at the increases in per capita output:
• 11-15% from human capital
• 8-15% from improving allocative efficiency (e.g. moving from state-owned to private and from rural to urban)
• 16-17% from the effects of innovation

Innovation and human capital are important in sustaining productivity growth – this is crucial for China in the next decade. China has gone from 10 million state owned businesses twenty years ago to 200,000 now

Sources of Innovation Gains

• Up to 2/3rds from imitation - China is the biggest recipient of FDI amongst developing economies and will enable swift catch-up as they can import ideas
• Relatively less from new technology - China is investing out of China which will improve their technology

source: tradingeconomics.com

Five Key Rebalancing Challenges for China

1. More reliance on their own domestic markets (especially services) and less on exports - services create jobs (they are more labour intensive)
2. Raise consumption and reduce inefficient savings. Consumption has fallen to less than 40% of GDP - greater share of income needs to go to workers, demand for broader welfare state.
3. Grow the private sector and reduce distortions from state-owned sector. State sector still accounts for 30% of industrial output and a quarter of urban jobs.
4. Increase the pace of innovation as imitation limits are reached
5. Continue the process of opening the Chinese economy into the global economic / financial system. This includes Chinese firms going global -foreign investment, notably in Africa but watch out for significant rise in Chinese investment in Europe.

Reform takes many years to deliver – Yueh argues that it might be shaped as follows:

• 2020: Restructuring and re-balancing the economy - Increased reliance on domestic markets - to counter export downturn and become more self-sufficient
• 2030: Productivity and innovation as the main growth drivers to lift China out of being a middle income country
• 2040: Strong and stable institutions