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Forum: The China “Growth Miracle” Examined

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
April 2007
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China’s phenomenal economic growth over the past three decades had been underpinned by its strong export performance. But what is driving this tremendous growth in trade, and what are the implications for the global economy? These were some of the questions explored at a research conference organized by the IMF on April 6 on the global implications of China’s trade, investment, and growth.

Dissecting China’s exports

China experts from the IMF, the U.S. Federal Reserve system, and academia presented a series of papers probing the nature of China’s exports and their relation to imports. Contrary to the belief that China’s export growth is from new, high-skill products, Mary Amiti (New York Federal Reserve) and Caroline Freund (IMF) found that only 5-15 percent of China’s export growth is in new products and that the skill content of China’s exports (excluding processing trade) has not increased. Li Cui and Murtaza Syed (both IMF) argued that the role of processing trade is declining in China, and the export sector relies more on domestic industries as suppliers for parts and components.

In contrast, Judith Dean, Zhi Wang (both U.S. International Trade Commission), and K.C. Fung (University of California, Santa Cruz) developed a methodology to measure the import content of China’s exports and found it has been rising over time, especially for more sophisticated products. Foreign investment has helped the export boom, according to Deborah Swenson (University of California, Davis), who found that the presence of foreign firms indeed promotes Chinese firms’ exports.

Impact on rich and developing countries

China’s boom is affecting rich countries and developing neighbors alike. Peter Schott (Yale University) found that although China’s exports overlap with those from advanced economies more than would be predicted from its size and level of development, its products are priced lower and price differentials have widened. This suggests that advanced economies may be adapting to competition from China by moving up the quality ladder. Alternatively, China’s productivity may be high and rising, implying that China’s exports will displace goods made in advanced economies.

Shaghil Ahmed and his coauthors at the Federal Reserve Board looked at the increasingly important role that China plays in East Asia. They found that, as an assembler of finished goods, China is primarily a conduit for growth, but its size and rapid development mean that it has the potential to become an important growth engine.

Looking ahead

In the future, IMF First Deputy Managing Director John Lipsky said, China would have to look inward to sustain growth by boosting internal demand, improving the financial system, ensuring more even growth between rural and urban areas, and addressing environmental concerns.

David Dollar (World Bank) and Shang-Jin Wei (IMF) said that improved allocation of investment will provide China with ample funds to increase consumption while maintaining growth. From the results of a survey of firms in 120 Chinese cities, they found that state-owned firms are still far less efficient than private or foreign firms even after two decades of reform. This implies that China could achieve the same growth rate with much less investment (and hence more consumption) if its allocation of capital were more efficient.

Caroline Freund and Zhiwei Zhang

IMF Research Department

These papers and a conference program can be found at http://www.imf.org/external/np/seminars/eng/2007/china/index.htm

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