Differential Growth in China's Sub-Economies

Can China sustain its high rate of economic growth?:

Will Super-High Chinese Growth Continue?, by Matt Nesvisky, NBER Digest: With an average annual increase in GDP over the last two decades of more than 9 percent, China's economic development has been nothing short of spectacular. But such astonishing growth inevitably inspires the perennial question: How long can China keep it up? In "China's FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth" (NBER WP 12249), co-authors John Whalley and Xian Xin attempt to answer the question with data supplied by the National Bureau of Statistics of China. They consider, in particular, the roles of what they call two distinct sub-economies. One involves the mainly manufacturing-based Foreign Invested Enterprises (FIEs), which are often joint ventures between Chinese enterprises (usually state-owned) and overseas companies supplying Foreign Direct Investment (FDI), product designs, and international sales networks. The second sub-economy is the non-FIE portion of China's economy in manufacturing, agriculture, and services.

The two sub-economies are of course related, but quite different. FIEs employ only 24 million workers out of a total workforce of 752 million, and their labor productivity is around 9 times that of the workers in the non-FIE sub-economy. The FIEs account for over half of exports and 60 percent of imports. Industrial FIEs are responsible for over 30 percent of China's industrial output. Also, FIEs are concentrated in Southern and Eastern China, intensifying any inequality that results from rapid growth. The FIE sub-economy currently is growing at around 18 percent per year, while the non-FDI portion is growing at about 5-6 percent annually. This suggests that if FDI inflows level off (as appears to have happened in 2005), the sustainability of Chinese growth in the 7-10 percent range may be doubtful.

In dollar terms, annual FDI inflows to China were less than $2 billion in 1985, but had ballooned to $61 billion by 2004. ... China's FDI inflows fall into two categories: horizontal FDI, which involves the transfer of production (mainly from North America and Western Europe) to service the Chinese internal market; and vertical FDI, which takes advantage of low-cost production in China for products to be exported and which is fueled mostly by China's Asian neighbors.

Whalley and Xin's analysis indicates that while the FIE sub-economy is still only 20 percent of China's total economy, it nonetheless accounts for over 40 percent of China's recent economic growth. This part of the Chinese economy thus has substantial implications for the sustainability of the country's future economic growth. However, whether rapid growth will continue depends on both continued growth in inward FDI and access to international export markets. While China's FDI inflow growth rate has averaged over 10 percent since 2002 (and China's association with the World Trade Organization), the authors' believe that the figures for 2005 are likely to show a leveling off, or even a slight decline, not least because FDIs have been moving to other low-wage countries. ...

An additional concern, the researchers say, is whether regional disparities within China will continue along with inward FDI. About 84 percent of China's inward FDI occurs in nine coastal provinces, leaving the remaining 20 provinces with 12 percent of inward FDI and resulting in great disparities in income. If growing inequality constrains growth, continued FDI flows could worsen matters. It remains to be seen whether the non-FIE portion of the economy can generate higher growth to compensate for the slowing growth in the FIE sub-economy.

In sum, a leveling-off or falling of FDI, limits to FDI diversification from other non-OCED countries, and continued growth of exports all raise cautions for continued high growth in China. These negatives are counterbalanced to a degree by an ever-improving policy environment for FDI in China, but this in itself seems unlikely to support still more FDI growth into China. Whalley and Xin strongly suspect that more robust growth from the non-FIE sub-economy will be needed to compensate for further lagging growth performance from FIEs.

If China can increase domestic consumption by reducing saving, or make a successful transition from export-led growth to consumption led growth -- both of which would help with global rebalancing -- that would help to stimulate growth in the non-FIE sector.

Comments

[slink]

great post mark

this two sector model would be improved

if we could look at comparative performance
of the FIE/no FIE sectoral divide
in manufacturing only

lumping all the sectors togather
~ 750 millions worth of producers
including
traditional sectors
of personal services
artisan crafts
and
peasant household farming
creates
"way noise"

[Letian]

This paper is nonsense! The real problem for China's economy is the impending political and social crisis. It is almost inevitable since the disparity on wealth in China is so exetreme!

So investing in China faces great political risks.

Many times Statistics/Econometrics just fails to unveil the real truth behind the figures.

As a final note,it is so stupid for the authors to do thier research on the data supplied by the National Bureau of Statistics of China! No one in China will believe the data supplid by government. SO garbage in garbage out.

[Letian]

In China, the government CREATS the data, not collect the data.

It is a common sense in China.

[Brandon Erik Bertelsen]

"If China can increase domestic consumption by reducing saving, or make a successful transition from export-led growth to consumption led growth -- both of which would help with global rebalancing -- that would help to stimulate growth in the non-FIE sector."

There's such a bigger social problem here. The Chinese will continue to look at the consumption of the west and want exactly that. But there's not much you can do when you live in the same place you work. Change has been coming for years it's just a matter of when. Reducing savings and leading growth with consumption are tied events, I don't really understand the "either" "or" statement.

It's a matter of adding freedom to their choices in consumption, housing, inter-provincial migration, and employment. The non-FDIs suffer from the basic bloat and inefficiencies of all communist-mentality managed public institutions. They "can't" grow without social/political change

[Richard]

According to the CIA Factbook, the Gini Index for China is virtually identical to that of the U.S., which suggests that income disparity in the U.S. and China are roughly the same.

Depending upon your biases, you can choose to see this as increasing disparity in the U.S., a change in disparity in China or the questionable collection of statistics by the CIA.

FWIW, I have found the data in the CIA Factbook to be largely trustworthy, with only occassional exceptions that appear to be politically motiviated.

[calmo]

Thanks Richard for that note about the Gini coef and the CIA's access to the data that turns in this amazing similarity. I don't know where Letian is coming from but I suspect (s)he has other impressions that we should not just dismiss as anecdotal. The country is not only huge, and posting gdp that average 9% over the past 2 decades, but it does not have the resources, the infrastructure, the institutions that allow us to put the same firmness on the data streams (like that 9% for instance) that we are used to.
So Letian, I'm giving you some space. Most of us don't think the same quality of data is coming out of China as the US, but I'm hoping it's improving. You might be able to do better than give us the impression that it is all hopeless lies. Do you have an alternative to the Official China numbers? Are some numbers better than others? Are there alternative numbers that people use and need to make decisions that are not official?

[a]

The Authors of the paper actually did talk about the data accuracy issues form China:

"Relevant to our discussion is the accuracy of FDI inflow data as reported by the National Bureau of
Statistics China (NBSC) since there are discrepancies between FDI figures as reported by China and by
individual investing countries (UNCTAD, 2005; Gao, 2005; Xiao, 2004). Taking Hong Kong and the U.S. as examples, UNCTAD (2005) reports FDI inflows from Hong Kong in 2002 of U.S. $ 17.9 billion by China compared to U.S.$ 15.9 billion reported by Hong Kong; FDI inflows from U.S. in 2002 were reported by China as U.S.$ 5.4 billion compared to U.S.$ 0.9 billion as reported by the U.S.
authors raise the possibility that for some investing countries there is under-reporting of FDI in China to
Chinese statistical agencies (UNCTAD, 2005; Gao, 2005). In 2001, FDI inflows from the United
Kingdom were U.S.$ 0.9 billion as reported by China (NBSC), but U.S.$ 1.1 billion reported by the
United Kingdom (UNCTAD, 2005); and in 2000 FDI inflows from Hong Kong were U.S.$ 15.5 billion as reported by China, and U.S.$ 46.4 billion as reported by Hong Kong . "

I have to say that this NBER paper is very thoughtful and sophisticated, not as Letian's comments, which is too black and white and without detailed analysis.

I quite like the approach and insight this paper illustrates. I do wonder, if one can do similar research on economic development of Japan, Korean, Taiwan, etc. and see how countries already successful were using FIE in their developing years; and also repeat it on other developing countries in the Asia Pacific region to see the pattern difference --- there might be some policy guidance that one can draw here.

And lastly, China is addressing the issue of over-saving and consume enough. But I do agree with Bradon on "The Chinese will continue to look at the consumption of the west and want exactly that." I found it worrisome. Some of my upper middle class friends in Shanghai are buying cars even though it does not really bring the convenience in a city so congested. China need to find its own consumption pattern needs that is more conductive to the long term hapiness of the people than just simply blindly following the pattern of a country that are consuming 25 times of energy per capita that of Chinese people. It will be good for everyone on earth if CHina can find their way of development.

[Absurdfool]

Statistics reliability
NBSC releases annually FDI contracted and realized figures. Contracted figures are not actually reliable as localities use them to boost up and beautify their records. Realized figures are those being put into ventures' bank accounts, or so to speak 'paid up'. China uses calender year for its financial account, it may be different from hongkong, and the like. General statistics released in past decades are becoming more reliable, as the central govt has to use them as economic signals for macro-economic regulations since mid-1980s' decentralization of decision-making power. Figure releases of protests, strike etc since 2003 is an example. It's also used to justify hu-wen duo's policy shift, say from an investment-driven to a sustainable (consumer-driven plus welfare) growth model.

[Cheer]

I found that the problem with China data is mainly resulted from the different statistics standards employed by different statistics bureau. (National level, Provincial level, City Level...for the concern of data consistency, it's better not to combine/mix data from the above resources. and also should keep an eye on explanatory items.)
Therefore, in order to get the most accurate data, try to confirm with the NBSC consultants. They have english hot lines.
Good luck with all.

P.s. Always remember to save some air for yourself.--To Letian