Perspectives on China’s Economic Growth

Yingyi QianSchool of Economics and Management

Tsinghua UniversityDecember 1, 2010

Agenda

• China’s growth in international perspectives• What drives China’s growth• What will sustain China’s growth

Growth of GDP per capita: China, India, and Indonesia (2005 US$ PPP)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

GD

P p

er c

apita

at 2

005

US

$ P

PP

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IndonesiaIndiaChina

Source：Penn World Table 6.3, 2005 US$ PPP

China seems to have the highest growth rate(Indices of GDP per capita at 2005 US$ PPP,

1978=100)$7868

100

200

300

400

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700

80019

7819

7919

8019

8119

8219

8319

8419

8519

8619

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9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

08

China(1978-2007)Korea(1978-2007)Taiwan, China(1978-2007)Japna(1978-2007)

Source：Penn World Table 6.3, 2005 US$ PPP

China’s growth is not unique

• Continuation of the East Asian growth story– Japan after 1950– Taiwan after 1958– South Korea after 1962– China after 1978

• Timing of the Olympic Games– Tokyo: 1964– Seoul: 1988– Beijing: 2008

China’s growth is not so special (Indices of GDP per capita at 2005 US$ PPP)

$7868

100

300

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700

900

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1300

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1700

1900

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Japan(1950-2000)Taiwan, China(1958-2007)Korea(1962-2007)China(1978-2007)

Source：Penn World Table 6.3,2005 US$ PPP

(2007)(1969)

(1991)(1987)

100

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500

700

900

1100

1300

1500

1700

1900

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Japan(1950-1990)Taiwan, China(1958-2007)Korea(1962-2007)China(1978-2007)

Source：Penn World Table 6.3,2005 US$ PPP

China’s fast growth is not so special (Indices of GDP per capita at 2005 US$ PPP)

Growth comparison between China and other Asian economies (GDP per capita at 2005

US$ PPP）

$7868

0

3000

60008000

12000

15000

18000

21000

24000

27000

3000019

5019

5219

5419

5619

5819

6019

6219

6419

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

10

Japan(1950-2007)Taiwan, China(1958-2007)Korea(1962-2007)China(1978-2010)India(1991-2007)

Source：Penn World Table 6.3, 2005 US$ PPP, post-2007 values for China extrapolated at 1995-2007 growth rate

GDP per capita of China remains lower than the world average (2007 data at 2005 US$ PPP)

42897

31443 30587

23852

1527313401

10179 96447868

51863825

2341 2024

0

10,000

20,000

30,000

40,000U

S

Spa

in

Japa

n

Kor

ea

Arg

entin

a

Rus

sia

Wor

ld

Bra

zil

Chi

na

Indo

nesi

a

Indi

a

Ban

glad

esh

Ken

ya

Source：Penn World Table 6.3, 2007 GDP per capita at 2005 US$ PPP

Sources of growth: massive investment (gross fixed investment as share of GDP)

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1 3 5 7 9 11 13 15 17 19 21 23 25 27 29Year

Japan (1950-1973)* Taiwan, China (1962-1987)* South Korea (1962-1990)* China (1978-2005)**

Source:* WDI, **CSY(2006)

5

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35

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Investment excluding inventory, before taxes

Excluding urban residential housing,including inventories,before taxes

Excluding urban residential housing,including inventories, after inderect taxes

The estimated return to capital in China

China’s expressways

• China’s expressways– 1988: 147 km– 2005: 41,000 km– Planned: 85,000 km

• U.S. interstate highways system– The National Interstate and Defense Highways Act of

1956 (“Federal Highway Act of 1956”)– 40,000 miles (65,000 km) of interstate highways

planned– The biggest public works project, 30 years to complete

China National Expressway Network Plan

China’s high-speed railway network under plan: 13,000km

• Four “North-South” routes– Beijing-Shanghai（北京--上海）

– Beijing-Shenzhen（北京--深圳）

– Beijing-Harbin（北京--哈尔滨）

– Hangzhou-Shenzhen（杭州—深圳）

• Four “East-West” routes– Xuzhou-Lanzhou（徐州--兰州）

– Hangzhou-Changsha（杭州--长沙）

– Qingdao-Taiyuan（青岛--太原）

– Nanjing-Chengdu（南京--成都）

510

1520

2530

35B

udge

tary

reve

nue

shar

e in

GD

P

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Budgetary revenue share of GDP

Source: China Statistics Yearbook.

SOE net profit as share of GDP0

510

15R

atio

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OEs

' pro

fit to

GD

P

1978

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World ranking of China’s 8 largest banks (market value on April 28, 2010)

5722Minsheng（民生银行）

5026SPDB（浦发银行）

4532CITIC（中信银行）

3345CMB（招商银行）

2653BoCom（交通银行）

7145BoC（中国银行）

2187CCB（建设银行）

1226ICBC（工商银行）

World RankingMarket Value (US$ billion)

Banks

ABC（中国农业银行）went IPO on July 15, 2010.

China’s 10 largest firms by revenue in Fortune 500 (2009)

China Telecomm（中国电信）

China Construction Bank（中国建设银行）

China Southern Power Grid（中国南方电网）

Bank of China（中国银行）

China Life（中国人寿）

China Mobile（中国移动）

Industrial and Commercial Bank of China（工商银行）

China National Petroleum（中国石油）

State Grid（国家电网）

Sinopec（中国石化）

1098765432

1

Conditions of China’s economy overtaking the U.S. by 2030

• China’s economy is the second largest in 2010• China’s economy was 35% of US in 2009

(US$4.9 trillion vs. US$14 trillion)• China’ economy will overtake the US by 2028

under the condition that the sum of the following is greater or equal to 6%: the growth differential, RMB appreciation rate, and inflation rate differences (for example, China’s growth rate is 7%, the US is 3%, RMB appreciates at 2% per year, and the inflation rates are the same)

Sustainability of growth

• Two ways of economic growth– Increase of the use of resources (capital and

labor) with the available technology– Development of new technologies (innovation)

• Innovation is the only way to sustain growth after the initial stage of development

Can innovation be planned?

• “The National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)” (published on February 9, 2006)

• Campaign for “indigenous innovation”• R&D spending as % of GDP

– 1% in 2000– 1.54% in 2008– Target: 2.5% in 2020

• Focusing on 16 megaprojects

Lessons from the past

• Lessons from the Soviet Union in 1950s-1980s

• Lessons from Japan in 1980s– High definition televisions– The fifth generation computers

• Lessons from China in 1960s and 1970s– Atomic and hydrogen bombs and man-made

satellites

Being an entrepreneur in China

• Advantages– The first generation pioneers (like the US in the 19th

century)– Enormous size and scale of the domestic market (20%

of the world population)• Disadvantages

– Insecure property rights (including IP) and poor legal institutions

– Opportunity costs: the strong government and state sector

Total college enrollment (million) and raw college enrollment rate (%)

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6

9

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raw

col

lege

enr

ollm

ent r

ate

(uni

t, %

)

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tota

l col

lege

enr

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ent (

unit,

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on)

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total college enrollment (left)raw college enrollment rate(right)

Source: China Statistical Yearbook 2010, China Populatoin Statistical Yearbook(various years)Notes: raw college enrallment rate calculated for population of 18-21 year old

The talent development plan

• “The National Medium- and Long-Term Talent Development Plan (2010-2020)”(published on June 6, 2010)

• “The Thousand Talents Program”: Bring back to China 2,000 top talents within five to ten years

The plan for educational reform and development

• “The National Medium- and Long-Term Plan for Educational Reform and Development (2010-2020)” (published on July 29, 2010)

• Targets:– Raw enrollment rate of college students: 40%

in 2020– Government fiscal expenditure on education as

% of GDP: 4% in 2012

Difficulties in nurturing creativity

• Students lack of– Curiosity– Imagination– Critical thinking

• Institutional and cultural constraints on– Free inquiry– Independent thinking

Career aspirations by Chinese college graduates

• A survey of college graduates in August 2010: What is your most desirable job?– Government agencies: 63%– State-owned enterprises: 11%– Start-up companies: 10%– Non-profit organizations: 8%– Foreign and joint ventures: 5%– Private enterprises: 1%

Unprecedented challenges

• Institutional transformation– Unfinished reforms on the economic system– So little change in the political system

• Backlash from the current financial crisis– Reversal of market-oriented reforms– Delay of structural adjustments (consumption,

investment, service sector, export, etc.)– Expansion of the state sector and retreat of the

private sector