Academic journal article The Journal of Developing Areas

Is China's Economic Growth Sustainable? a General Equilibrium Analysis

Academic journal article The Journal of Developing Areas

Is China's Economic Growth Sustainable? a General Equilibrium Analysis

Article excerpt


With an annual growth rate of around 10% in real terms over more than three decades between 1979 and 2012, China has become the largest exporter, the largest holder of foreign exchange reserves, the largest destination of foreign direct investment (FDI) and the second largest economy in the world. This remarkable performance has exceeded the growth record of almost all other countries in the world during the same period. Its annual growth rate of GDP per capita has also been maintained at more than 7.5% in real terms (Hofman and Kuijs, 2008) and this growth could be more dramatic if the purchasing power parity, instead of constant market price, is used in the measurement (Perkins, 2012).

Since 2008 when the worldwide economic recession spread over, the growth of China's exports and real GDP has been slowed for several consecutive years. This has raised some concerns on whether the Chinese economic growth will be sustained in the future. The accelerated appreciation of the Renminbi since the second half of 2010 has also made the economic situation worse (Zhang, 2012). As a result of a significant slowing down in external demand, the Chinese authorities have started to switch China's development strategy from export-orientation toward domestic market promotion particularly on boosting domestic consumption through carrying out further economic reforms at home. However, without knowing the concrete road map and timeline of these reforms, the feasibility of this transformation remains a question, particularly when the problems in its domestic market, namely excess production capacity, rising debt, distortion in financial sector and lack of competition are still present.

The purpose of this paper is threefold: First, it attempts to identify the sources of past economic success in China, particularly on how international trade, FDI and migrant workers contribute to its miraculous economic growth. Second, it attempts to evaluate whether there are any other economic potentials available for China so that the exploitation of these potentials could allow China continuing its past economic growth. Third, based on the results of some counter-factual simulation experiments running on a well-known computable general equilibrium (CGE) model, it offers an answer to the question of whether the Chinese economic growth can be sustained in the future. The rest of the paper is organised as follows. The next section provides a brief review on the debate of China's economic growth and its sustainability. This is followed by an introduction of the methodology and several counter-factual scenarios designed for simulations in Section 3. The simulation results are reported and discussed in Section 4 before conclusion and policy implications are generalised in the final section.


The sources of China's economic growth have been perceived as a result of market - oriented reforms, rapid structural change, effective catching up and exploitation of comparative advantage by some (e.g. Lin et al, 1996, Holz, 2008), and as a result of unlimited supply of surplus labor, massive inward FDI and export-oriented growth by others (e.g. Whalley and Xin, 2010, Perkins, 2012, Zhang 2012). The Chinese economic growth is believed to be sustainable as long as these factors persist in the future. The pessimists argue that the Chinese economic miracle may begin to end, as economic potential of exporting labor intensive goods based on simple technologies starting to exhaust when the so-called Lewis Turning Point is reached (Krugman, 2013). The high and growing investment from both home and abroad, underpinned by an even higher savings rate, may also unsustainable. Furthermore, restructuring the "unbalanced" economic structure and slowing down in FDI growth will drag China back from its double digit growth rate in the past (Hofman and Kuijs, 2008, Prasad 2009, and Lardy, 2012).

While the pessimistic view is growing along with the global economic downturn, the optimistic view which is based on the past experience of Japan and other newly industrialised economies in East Asia remains optimistic and maintains that China's huge economic potentials would keep underpinning China's economic growth for several decades to come (Holz, 2008, Perkins, 2012). …

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