Source: Compilation of the Statistical Data of China’s Industrial Transportation and Energy for 50 Years and The China Statistical Yearbook over the years.
So, how can we understand the phenomenon of the coexistence of a high rate of investment and a rising capital return in China? This phenomenon is not only inconsistent with the law of diminishing marginal capital returns but also significantly different from the international developmental experience. Solving this riddle is undoubtedly the key to understanding China’s model of economic development.
2. The riddle of China’s rising savings rate
China’s national savings rate has been rising steadily, and especially in the 21st century, it has risen faster from 37.6% in 2000 to 52.6% in 2010, and recently fallen to 49.5% in 2014 (see Figure 1.4). China’s high savings support not only its high investment from the capital supply side but also greatly contribute to the imbalance of the country’s economic structure. On the one hand, the imbalance of the low consumption–high savings structure starts to emerge; on the other hand, the storage–investment difference is expanding, resulting in an external imbalance.9 Greenspan even argues that a high savings rate in developing countries has led to the long-term low interest rate and been the fundamental cause of the housing bubble and the global financial crisis of the past two decades.10 Therefore, it is particularly important to explain the reasons for China’s high national savings rate and thus develop the idea of alleviating structural imbalances.
To understand the root cause of the rising rate of national savings, it is necessary to decompose the structure of national savings. According to departments, national savings can be divided into resident savings, enterprise savings and government savings. Figure 1.5 shows the proportion of those three types of savings in the national savings since 2000. In 2009, the three types of savings accounted for 48.3%, 41.9% and 9.8% of national savings, respectively, clearly showing the dominant position of residents and enterprises in the national savings. In recent years, the savings rate of residents (residents’ savings rate) and the savings rate of enterprises both have shown an upward trend to jointly raise the overall national savings rate. Therefore, the discussion of resident savings and enterprise savings is conducive to understanding the national savings rate. Fan Gang and Lu Yan explain why the enterprise savings rate has been rising in recent years.11 Through study, they believe that China is still in the dual economy state before the Lewis turning point, and the existence of a surplus labor force puts the labor force in a weak position in the game of labor and capital, further leading to a slow increase in wages; with the reform of the system and the opening-up of the market, the efficiency of the production of enterprises has greatly improved, but capital occupies more of this part of the value. With the expansion of the capital scale, profits will accumulate at a higher rate and eventually form large-scale enterprise savings.
Figure 1.4. China’s national consumption rate and savings rate (1980–2014).
Note: The consumption rate is the proportion of consumption expenditure in the GDP with an expenditure-based GDP accounting; savings rate = 1 − consumption rate.
Source: China Statistical Yearbook.
China’s resident savings rate also keeps rising from 31.1% in 2000 to 40.4% in 2009 (Figure 1.6). In spite of a slight decrease in recent years, the proportion of resident savings is still large and will further increase under the guidance of the policy of “increasing the disposable income of residents”, which will play a significant role in determining the trend of the national savings rate in the future. In addition, according to the international comparative study of Blanchard and Giavazzi, the savings rate of Chinese enterprises and of the Chinese government are not exceptional in transnational comparisons, and the high savings rate in China is still closely associated with a high resident savings rate.12 Thus, it is necessary to focus on the reasons for the rise of the resident savings rate in China in recent years, and further explore the trend of the national savings rate.
Figure 1.5. Proportion of three-sector savings in national savings (2000–2009).
Source: 2001–2010 Fund Flow Statement in The China Statistical Yearbook.
Figure 1.6. China’s resident savings rate (2000–2009).
Source: 2001–2010 Fund Flow Statement in The China Statistical Yearbook.
3. The riddle of “Okun’s Law” not being applicable to China
In recent years, China’s job market has maintained a good condition without being significantly affected in the context of the economic downturn. For example, the registered urban unemployment rate was about 4% and the surveyed unemployment rate was about 5% in 2014, almost unchanged from 2013. Moreover, China’s economic performance since the reform and opening-up suggests that, as for the market of China’s labor force and its macroeconomic fluctuations, a significant inverse relationship has not been established between the GDP growth rate and the unemployment data, as inferred by the standard model of Okun’s law. This seems to show that China’s macroeconomic cycle lacks a due correlation with the changes in the labor market, or the model of Okun’s law is not applicable to the Chinese empirical data.
Okun’s law, as a standard model of modern macroeconomics textbooks, is essentially used to analyze the relationship between a country’s macroeconomic cycle and the labor market changes, and its specific form is to reveal the stable negative relationship between a country’s unemployment rate and actual output. Figure 1.7 shows the annual data of the changes in the US unemployment rate and the economic growth rate from 1948 to 2013, indicating that the Okun relationship was roughly established. In the late 1970s, China began to implement the reform and opening-up policy and gradually set up an institutional framework for the market, with an annual growth rate of nearly 10% achieved over the past 30 years. The intensification of the market-oriented reform led to an increase in the unemployment pressure in China in the late 1990s, which prompted the government to give importance to the objectives of the employment policy. Quite a lot of the literature has focused on the relationship between Okun’s law model and the Chinese data in academic circles. Surprisingly, as shown in Figure 1.8, there is no significant inverse relationship between China’s GDP growth rate and the official unemployment rate as described by Okun’s law, which is in sharp contrast with the situation in the United States.
Figure 1.7. Okun’s law for the United States (1948–2013).
Source: The Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS).
Researchers have investigated the applicability of Okun’s law in China from different aspects. Some scholars have discovered that there is no significant relationship between the change in the rate of registered urban unemployment and the economic growth rate in China, and that the real GDP growth rate and the change in the rate of unemployment vary greatly from the assumed form of Okun’s law.13 Yin Bibo