ZHANG Xiaojing Institute of Economics, Chinese Academy of Social Sciences Budapest, June, 2011 Transformation of China ’ s Growth Model

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  The largest exporter after overtaking Germany in  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  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 Source: Arora and Vamvakidis (2010) (cumulative effects of a 1 percentage point rise in China’s growth on growth in other countries, in percentage points)

China factor  China’s price  China’s market  China’s role in global governance

Lessons from Asian Crisis economies High growth periodSustained years Annual growth rate （ %) Singapore Hong Kong Taiwan Korea Thailand Indonesia Malaysia China

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.

 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 Unbalanced growth Challenges China ’ s future development

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