Chapter 1
Introduction
I. Characteristics of China’s Economy
Since the reform and opening-up in 1978, China’s economic development has achieved a remarkable feat, with a real GDP growth rate of nearly 10% on average in the past 36 years, and a 28-fold increase in the total GDP in 2014 from 1978 (see Figure 1.1). The total GDP measured in US dollars at a market exchange rate exceeded $10 trillion, and its share of the global economy rose from only 1.9% in 1980 to 13.4% in 2014, and if measured in purchasing power parity, that share rose from 2.3% in 1980 to 16.3% in 2014.1 In terms of all indicators, China’s economic development in the past nearly 40 years is a miracle in the history of world economic development.2 However, since the outbreak of the global financial crisis, China’s economic growth rate has gradually declined, from the peak of 14.2% in 2007 to 6.9% in 2015, with a decrease in the growth rate by half. Most forecasting agencies have lowered China’s growth forecast to about 6% in the coming years.3 Besides, the general concerns about China’s economy are the economic structure imbalance and the sustainability arising from high investment and high savings rate. Fortunately, China’s job market still seems to be in good shape without being significantly affected in the context of the economic downturn. How to understand China’s economic development, economic structural imbalance and recent labor market performance becomes a major concern for academics and policymakers.
Figure 1.1. China’s GDP growth rate and GDP index (1978–2014).
Source: China Statistical Yearbook prepared by the National Bureau of Statistics.
A review of China’s economic developmental experience in recent decades reveals the following three basic characteristics. First, since the reform and opening-up, China has maintained an extremely high rate of investment, 39.4% per year on average, nearly 50% in recent years, which is almost twice the world average. For a long time, however, China’s return on capital has shown a sustained upward trend rather than a downward trend. Second, since the reform and opening-up, China’s national savings rate has been rising steadily; especially in recent years, it has risen faster from 37.6% in 2000 to 52.6% in 2010, and fallen to 49.5% in 2014. Third, no significant inverse relationship exists between China’s GDP growth rate and the existing data for the unemployment rate described by Okun’s law, which seems to indicate a lack of a necessary correlation between China’s macroeconomic cycle and the changes in the labor market. These three characteristics involve China’s investments, savings, economic growth and labor market, so that they are the key to an understanding of China’s model of economic development.
Considering the key characteristics of China’s economic growth, it is apparent that the key to an understanding of China’s model of economic development is to understand China’s high amount of investments, high savings rate and its labor market, while the key to an understanding of China’s high amount of investments and high savings rate is to understand China’s high capital return and improvement in productivity, and then to understand China’s technological progress and continuous large-scale transfer of agricultural labor. The transfer of agricultural labor in turn forms a unique pattern of the relationship between China’s labor market and the macroeconomic cycle. To highlight their importance, this book summarizes the three basic characteristics as the riddle of China’s rising return on capital, the riddle of China’s rising savings rate and the riddle of Okun’s law that is not applicable to China. In the following sections, we will introduce the three basic characteristics or the riddles of development in detail to further present the research ideas of this book.
1. The riddle of China’s rising return on capital
The most striking thing is that China has maintained a high rate of investment in the context of the rapid growth of China’s economy. The calculation based on the data released by the National Bureau of Statistics showed that China’s investment rate was never lower than 30% from 1980 to 2014, averaging 39.4%. In the 21st century, China’s investment rate has risen further, close to 50% recently, far higher than that of other countries in the world and almost twice the world average (see Figure 1.2). China’s high amount of investments has not only supported the rapid economic growth but has also aroused widespread concerns about the economic structural imbalance and sustainability. Therefore, it is more worthwhile to further study and analyze why China can maintain such a high rate of investment for a long term. In the world, the problem facing most countries is always an insufficient amount of investments rather than the high rate of investment. In other words, it is not easy to keep such a high rate of investment in the long run, and even in the presence of favorable policies, it is almost impossible to achieve it without economic fundamentals.
For this reason, it is necessary to deeply analyze the capital return in China. The study shows that such a high rate of investment in China has not led to a decline in the capital return; on the contrary, much empirical evidence provided by scholars in recent years shows that, since the middle and late 1990s, China’s return on capital has been on the rise for a long time, as reported earlier by the World Bank.4 The results of the estimation of China’s return on capital by Bai, Hsieh and Qian based on the national income data suggest that China’s return on capital has been maintained at a high level of more than 20% throughout the period of reform and opening-up, and also has been on the rise in recent years.5 In view of the results of the calculation of capital returns and of capital stock data in the financial accounts in industrial enterprises, the Research Group of the CCER China Economic Observer demonstrates that China’s return on capital presents a feature of first falling then rising, and the nine series of indicators show a sustained trend of growth after the end of the last century. By calculating the rate of return on industrial capital, Shu Yuan, Zhang Li and Xu Xianxiang also point out that the rate of capital return in China has increased significantly over the past decade.6 From the perspective of vintage capital theory, Fang Wenquan re-estimates the capital return in China, and adjusts the rate of capital return downward by 3%–5% by virtue of the revised depreciation rate, but the overall change remains upward.7 Based on the calibration of statistical caliber and the method of calculation, Zhang Xun and Xu Jianguo match the different measurement methods of capital return in China, and further conclude that the total return on capital has risen steadily from 1998, but dropped in 2009; however, the return on industrial capital still presents an upward trend, for instance, the return on industrial fixed assets was up to 27.8% in 2012.8 The upward trend of China’s return on capital is clearly shown in the report data in Figure 1.3.
Figure 1.2. Comparison of investment rates between China and the world’s major economies (1980–2014).
Note: Investment rate, known as capital formation rate, refers to the percentage of total capital formation in GDP.
Source: World Economic Outlook Database compiled by the International Monetary Fund.
Figure 1.3. Return on industrial capital in China (1993–2014).
Note: The two kinds of Chinese industrial