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									Transformation of China’s Growth Model

                ZHANG Xiaojing

              Institute of Economics,
        Chinese Academy of Social Sciences

               Budapest, June, 2011

 China’s rise attracts worldwide attention

 Challenges to China’s growth model

 Institutional reform to transform the
  development mode
Rise of China
 The world’s second largest economy after the U.S. at market
  exchange rates since 2010.

 The largest exporter after overtaking Germany in 2009.

 The largest manufacturer followed by the U.S. in value added
  measured in current prices.

 The second largest recipient of FDI after the U.S. with about
  $100 billion in 2010.

 The world's largest holder of foreign-exchange reserves.
  (about USD 3 trillion till 2011Q1)
China's Share of World GDP (%)

     Source: World Development Indicators
China's Share of World Exports of
Goods and Services (%)

        Source: World Development Indicators
Global impacts of China’s growth
(cumulative effects of a 1 percentage point rise in China’s growth on growth in other countries, in
percentage points)

 Source: Arora and Vamvakidis (2010)
China factor

 China’s price

 China’s market

 China’s role in global governance
Lessons from Asian Crisis economies

                                                 Annual growth rate
            High growth period Sustained years         (%)
Singapore       1961-1997            37                 8.6
Hong Kong       1962-1988            27                 8.6
Taiwan          1962-1994            33                 9.0
Korea           1963-2002            40                 8.0
Thailand        1965-1995            31                 7.9
Indonesia       1968-1996            29                 7.0
Malaysia        1971-1997            27                 7.6
China           1978-2009            31                 9.9
Potential growth will slow down
 Our study shows: In the past three decades, China’s
  potential growth rate is 9.5%, about 1.3 percentage point is
  the cost of environment, entering the new century, the
  contribution of environment is 2 percentage point to GDP

 If we take account of the demographic change (i.e., the
  reduction of working age population) and low carbon
  constraint, the potential growth rate will be below 8% in the
  next decade.
Unbalanced growth Challenges
China’s future development
 Economic catching-up with distorted factor prices wastes
  resources and damages the environment.
      Over-dependence on investment and heavy chemical industries are
       especially unsustainable with the depletion of natural resources.
 Unbalanced growth momentum
      Demand side: rely heavily on investment and export, not private
      Supply side: rely heavily on secondary industry, not tertiary industry
      Factor input side: rely heavily on capital and labor, not TFP
 A narrow-minded focus on growth without fair distribution
  leads to a mismatch between economic and welfare
      Mid-income trap
Middle income transition
Government role should be changed
 Transformation of government role
    Government should play down its role in promoting economic
     growth and gradually evolve into a service-oriented organ.
 Adjust the evaluation system of local governments’
    Local governments' passionate involvement in economic
     activities is rooted in the evaluation system of civil servants.
     Only when more social indicators, such as the growth rate of
     residents' incomes, employment, social security and
     environmental indices, are made a decisive part of the
     evaluation system can local governments start seriously thinking
     of changing their roles.
… rely more on market mechanism
 Transformation of growth model cannot just rely on
  government directives. More importance should be
  attached to market mechanism such as price signals and
  tax incentives.
    Only when the prices of energy resources are reasonable and
     taxes on resources and the environment are in place, can the
     ambitious energy saving and emission reduction goals be met.
    Only when direct taxes are increased by a large margin, can
     local governments be prompted to build better local industrial
     structures rather than just blindly expanding the scale of
    Only when relations between central and local finances are
     properly managed can the over-dependence on land transfer and
     lopsided malformation of the real estate market be corrected.
Today’s choice shapes the future

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