Rapid Economic Growth and Its Sustainability in China

Abstract

China has recorded remarkable growth rates for three and a half decades. Recently, the annual growth rate has slowed down and is projected to decline gradually to 5 % by 2030. This article examines how high economic growth was realized in the past and whether it can be sustained in the future. In doing this, the paper takes into consideration the projections about future growth rates. The article emphasizes that the main reason for the reduction in the future growth rates is the unsustainability of the currently high investment rates in the long run. In addition, the diversification of financial instruments for the already high savings is important. Necessary improvements in the financial sector are discussed in conjunction with the long term sustainability of economic growth rates

Keywords

• China, economic growth, investment, financial sector, savings.

References

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8. (GDP), refers to net capital stock, and refers to the rate of capital consumption (depreciation

9. rate). is a mathematical operator showing change. This equation implies that investment
10. to GDP ratio of the left hand side of the equation is made up of two components on the
11. right hand side. The first component is the change in the capital-output ratio. That is to say
12. if capital stock, K, is expanding faster than GDP (Y) this means that investments are also expanding faster than output, hence the investment-GDP ratio gets larger in value. The second component is the capital-output ratio multiplied by the sum of the depreciation rate and the efficiency of capital. Part of the investment is made to compensate for the wearing off of the existing capital stock. The term implies the efficiency of capital because it is defined as the increase in GDP divided by the capital stock.
13. Further calculations yield that the first term averaged minus 5.2 % for 1986-1995, but turned positive afterwards, averaging 4.3 % for 1996-2005 and 4.9 % for 2006-2011. On the other hand, the major source of the increase in ratio was the second component, thanks to the rising ratio, which averaged 33.3, 29.4, and 40.3 % for the periods, 1986-1995, 1996- 2005, and 2006-2011, respectively.
14. A contrary view was expressed by Xiaodong Zhu who offers a critical perspective in this regard. See Xiaodong Zhu, “Understanding China’s Growth: Past, Present, and Future”, Journal of Economic Perspectives, Vol. 26, No. 4 (Fall 2012), pp. 103-124. According to Zhu, productivity growth rate has increased in China and investments follow economic growth. Therefore, as opposed to the argument that economy grows because of large investments, the causal relationship may work the other way around.
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17. This is because economic growth in the previous analysis will be equal to the term.
18. According to the IMF’s official statistics, industrial capacity utilization rate in China has decreased from about 80 % in 2007 to about 60 % in 2011, and still below 70 % in 2014. See Lingling Wei and Bob Davis, “In China, Beijing Fights Losing Battle to Rein In Factory Production”, Wall Street Journal, 16 July 2014.
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22. Japan for undervaluing the yen and implementing neo-mercantilist policies. However, he
23. argues further that there is a stark difference between the two countries. China is much poorer than Japan in the 1980s and there are more opportunities for long-term economic development. In other words, China’s backwardness may work for the benefit of the country when its economy ails as the Japanese economy stagnated after the 1990s when most of the opportunities for economic growth had been obsolete. See Jörg Mayer, “Global Rebalancing: Effects on Trade Flows and Employment”, UNCTAD, Discussion Paper No. 200, September 2010.
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25. See Joseph Casey and Katherine Koleski, Backgrounder: China’s 12th Five-Year Plan, US- China Economic and Security Review Commission, 2011. 46 Ibid.
26. Jörg Mayer, “Global Rebalancing: Effects on Trade Flows and Employment”, UNCTAD, Discussion Paper No. 200, September 2010. 48 Ibid.
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