Transformation of China’s Growth Model
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
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
Source: Arora and Vamvakidis (2010)
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
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
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
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