Perspectives on China and India: China's Rapid Economic Growth

November 12, 2012

YiLi Chien, senior economist in the St. Louis Fed's Research division, discusses the driving forces behind China's extremely high economic growth rate and whether that growth is sustainable in the long run, especially given that much of its growth has been fueled by increased investments and exports. He describes other potential restrictions on growth, including inequalities, inefficiencies, environmental problems, and corruption and crony capitalism.

Presentation (PDF)


YiLi Chien: Thank you so much, Cletus. So the high growth rate in China is undeniable. From time to time, you're going to see the media, especially the major media, you're going to see a message or figures something like these. These show up in the New York Times, these show up in the Wall Street Journal, these show up in the Economist. So this speaker is going to deliver two messages. One is the growth rate in China in the past 20 years is extremely high. It's close to 10 percent while at the same time in the United States it's only 2.4 percent. Let me give you one example how fast this 10 percent is. So with 10 percent growth rate, a country can double its size within seven years. But while in a 2.4 growth rate in the United States it takes 30 years.

So normally you're going to see the report or news saying that while in the past 20 years China grew really fast and is catching up to United States. So last year Chinese GDP in total, around 75 percent of United States. Moreover, normally you're going to see in the news or media is going to indicate that if Chinese growth rate is the same as 10 percent while the United States only grows 2.4 percent, then China is going to be the biggest economy in the whole world, going to surpass United States and become the largest one within six, seven or 10 years. As the audience in the Dialogue with the Fed, normally we're not satisfied with that report. That's why you are here.

So we are going to go a little bit deeper to see that, well, why China grows so fast in the 20 years? And most importantly, how we're going to think of if China is going to sustain this high growth rate in the next 10, 20 years or forever? So the first topic today is first what has driven growth rate in China so high? The second one is that if this high growth rate can sustain in the long run or not. So as we move forward, I'm going to think of how the growth rate in China is.

In addition and our topic we're going to talk about today is the current issue we have with China. This year is election year. You're going to see the news, political debate. China issue is bringing up on the table again and again. So the biggest concern for United States is that we have a huge trade with China. It's going to cost U.S. jobs, it's going to hurt United States or not. This topic we're going to care about the most. So hopefully I can provide you with some alternative view which could be pretty different from the general media.

So let's start with why the growth rate in China is so high in the past 20 years. So this speaker is going to show you the investment and export to GDP ratio last year between China and United States. So to prove, one, is show the investment to GDP ratio and the other one show the export to GDP ratio. So how can we think of this figure? You can see a dramatic difference. So the first thing is you're going to see China. So the total GDP is a country how many goods and service is produced within one year. So in China this total amount, almost 50 percent is spent on investment. So if you happen to travel in China in the past five or 10 years, you're going to see new buildings, new roads, new machines, equipment, subway, airport, highways everywhere. And in many China cities like big construction area. So compared to United States, we only invest around 15 percent. It's highly contrast with China.

The second one is China's growth rate is also highly realized on exporting sector. So the red part here is showing the export to GDP ratio. So in last year, China is around 30 percent. This means 30 percent of the total goods and services produced in China is exported to some other country—Japan, United States or Europe. And this number, in the United States is also around 13 percent. So you're going to see that it's a dramatic difference between United States and China. And we know that the high growth rate in China is realized on the investment as well as the export.

Everything looks so bright so far. But you get a little bit concerned about if this investment-driven and export-driven growth rate is going to sustain in the long run or not. The answer is no. The reason for that is actually quite straightforward. For the investment part, the return and the efficiency of investment needs to eventually go down. Think of the following. China built a new airport in Beijing. How many more airports you need? China built a new subway system in Shanghai. How many more you need in Shanghai? You can build a highway from one city to nowhere, but you're not going to be productive, it's not going to help you to increase your GDP in the future. So China cannot just simply by invest more and more to sustain its high growth.

Moreover, in terms of exporting, as China gets richer and richer, there's no market for China to export this much of goods and services to overseas. Because China's GDP grows at a much faster rate compared to other countries. So there's not much market out there for China to sustain its high growth. Moreover, once Chinese get richer, the labor cost of production in China needs to be increased. Once that occurs, then Chinese product is going to face severe competition from other developing countries—Malaysia and Indonesia, for example.

Of course, China has many other challenges. The first one is the inequality. Not only the inequality across people in terms of their income as well as the wealth, but also the inequality between the urban and rural areas. If you happen to travel in China, the living standard right now in Beijing and Shanghai could be as high as in the United States. While if you go to the rural area, there are many poor farmers living in horrible conditions. This is some problem the Chinese people need to deal with. Moreover, inefficiency. Many markets in China is highly regulated—water, electricity, communication, banking sector—all of these sectors are highly regulated and just operate by a very small set of the firm. This firm was a state-owned enterprise and with very high efficiency. Of course, you have environmental problem. The air pollution, the water pollution in China is very severe so that many Chinese people start to worry about if their food or water is safe.

Finally, corruption, crime and capitalism are everywhere, from the bottom to the top officer, from the local government to central government. So given all of this, actually you can see that the growth rate of China is truly amazing. Even they have so, so many problems, they still can sustain high growth in the past 20 years. But looking forward, they need to deal with all these problems in order to be more advanced. So eventually sooner or later their growth rate has to go down.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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