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Transformation of China’s Growth Model
ZHANG Xiaojing
Institute of Economics,
Chinese Academy of Social Sciences
Budapest, June, 2011
Outline
 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
High growth period Sustained years
Annual growth rate
（%)
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
growth.
 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
consumption
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
progress.

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’
performance
 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
industry.
 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
THANKS