Understanding the Slowing Growth Rate - IA de Investigación especializada en el MIT

Understanding the Slowing Growth Rate
of the People’s Republic of China
DWIGHT H. PERKINS

∗

It is increasingly accepted that the gross domestic product (PIB) growth rate of
the People’s Republic of China (PRC) is slowing down, but the reasons for the
slowdown are not yet well understood. Part of the reason is that growth in all
countries that reach high-income status slows down when they reach a global
research income level that is still far below the level of the highest income
countries. In the PRC, on the supply side, this is happening because total factor
productivity (TFP) is slowing down whereas, because of slowing labor force
growth, it would have to increase in order to maintain near double-digit GDP
growth. On the demand side, a low share of household income in GDP has
required the PRC to maintain an unusually high rate of investment in transport
infrastructure and housing, but the rapid growth in both of these areas is coming
to an end. Environmental investment could take up the slack and keep aggregate
demand at a level that would fully employ resources. Finalmente, the PRC has reached
the point where the manufacturing share of GDP has peaked and will begin to
decline as the economy becomes increasingly service based, but services seldom
grow at the double-digit rates that manufacturing is sometimes capable of.

Palabras clave: TFP, GDP growth rate, housing construction, transport investment,
environmental investment, service-based economy
JEL codes: E6, O43, O47, P42

I. Introducción

It has become increasingly accepted within the People’s Republic of China
(PRC) and outside that the PRC’s slowing growth rate is a long-term phenomenon,
not a temporary or cyclical downturn. The future rate of growth can ﬂuctuate from
year to year depending on world economic conditions and on the PRC’s domestic
policies—notably whether the government calls for a ﬁscal and monetary stimulus
or not—but there are compelling reasons for believing that the long-term trend in
the growth rate is sloping downward. The PRC’s gross domestic product (PIB) may
well grow at 5% o 6% for the next 1 a 2 decades and possibly a point or two faster
than that for the next few years. If there is a ﬁscal stimulus comparable to what
occurred during 2009–2010, the rate could be even higher but with likely long-term
effects that would be negative.

∗Dwight Perkins: Harold Hitchings Burbank Professor of Political Economy, Emeritus, Departamento de Economía,
Harvard University. Phone: +1–617–495–2110. Correo electrónico: dwight_perkins@harvard.edu.

Asian Development Review, volumen. 32, No. 1, páginas. 1–30

C(cid:3) 2015 Asian Development Bank
and Asian Development Bank Institute
Publicado bajo Creative Commons
Atribución 3.0 IGO (CC POR 3.0 IGO) licencia

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2 ASIAN DEVELOPMENT REVIEW

Cifra 1. Per Capita Income at which Growth Decelerated
(Y = Number of countries; X = Per capita PPP GDP)

GDP = gross domestic product, PPP = purchasing power parity.
Nota: This ﬁgure is based on countries that achieved high-income status except for those whose high income was
mainly the result of petroleum exports.
Fuente: Eichengreen, Barry, Dwight Perkins, and Kwanho Shin. 2012. From Miracle to Maturity: The Growth of the
Korean Economy, pag. 33. Cambridge: Harvard Asia Center, distributed by Harvard University Press.

The slowdown in growth at purchasing power parity (PPP) per capita GDP of
entre $10,000 y $16,000 is normal and most high-income countries existing
today experienced such a decline when per capita GDP reached this level (Cifra 1).
The causes of this decline involve structural changes such as the end of a rural labor
surplus, that can be readily shifted to higher productivity urban occupations, y
the gradual shift away from manufacturing to services. To some degree, it is also
the case that middle-income countries can no longer simply copy what the high-
income countries did when they were at the middle-income level and must depend
increasingly on their own innovative capacity with its inevitable mistakes and dead
ends.

In the PRC’s case this slowdown is occurring at a time when the country
has a very unusual GDP structure on the expenditure side that complicates what
the country needs to do to maintain healthy development in the near and more
distant future. Put succinctly, the household consumption rate as a share of GDP is
much too low, and the investment rate is too high. The data and how they compare
with other economies in East Asia are presented in Figures 2 y 3. There have
been challenges to the reliability of these estimates, and it is likely that the ofﬁcial
Chinese ﬁgure for household consumption as a share of GDP is in reality somewhat
lower than it would be if such things as the implicit share of housing in consumption

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 3

Cifra 2. Share of Household Consumption in GDP

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GDP = gross domestic product, NSB = National Statistical Bureau, PPP = purchasing power parity, PWT = Penn
World Tables.
Nota: Matching shares of household consumption to GDP per capita and placing the economies in a single ﬁgure for
comparative purposes is an inexact process. The patterns, sin embargo, are clear even though one has to approximate the
consumption level for any given per capita income. The consumption shares are those in current prices.
Fuentes: Author’s computations; Heston, alan, Robert Summers, and Bettina Aten. Penn World Tables 7.1. Center for
International Comparisons of Production, Income and Prices, Universidad de Pennsylvania; National Bureau of
Estadísticas. 2013. China Statistical Yearbook 2013, pag. 62. Beijing: China Statistics Press.

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were properly measured. Adjusting for these possible biases, sin embargo, still leaves
the household consumption share unusually low.

Another way to view this structure is to realize that the low household con-
sumption share virtually requires that the investment share be excessive. An un-
usually high investment rate in turn will typically mean that the marginal rate of
return on investment and overall total factor productivity (TFP) will be lower than it
would be if the investment share were smaller. There is reason to believe that is the
case in the PRC at present and may well be the case in the years ahead. A diferencia de,
the PRC in the 1980s and through the ﬁrst years of the 21st century maintained a
high rate of TFP growth and avoided a declining rate of return on investment in
part because of large shortages in transport and housing resulting from 2 decades of
neglect of these sectors before 1978. Later in this essay, we shall deal with the nature
of these high transport and housing investment requirements and why their absence
in the future will not justify a similarly high rate of investment in the decade or two
ahead.

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4 ASIAN DEVELOPMENT REVIEW

Cifra 3. Share of Investment in GDP

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GDP = gross domestic product, NSB = National Statistical Bureau, PPP = purchasing power parity, PWT = Penn
World Tables.
Fuentes: Author’s computations; Heston, alan, Robert Summers, and Bettina Aten. Penn World Tables 7.1. Center
for International Comparisons of Production, Income and Prices, Universidad de Pennsylvania; National Bureau of
Estadísticas. 2013. China Statistical Yearbook 2013, pag. 62. Beijing: China Statistics Press.

II. The Low Household Consumption Share in GDP

The PRC began the reform period in 1978 with consumption already account-
ing for a low share of GDP, and that share has fallen steadily since. The initially
low consumption level was partly because most investment went into heavy indus-
try in urban areas, while restrictions on rural-to-urban migration prevented a large
majority of the population from sharing in the income generated by that investment.
Mientras tanto, urban wages were held down by the potential availability of low-cost
surplus labor in the countryside.

Migration restrictions encouraged more capital-intensive production methods
than would normally occur in a country with low per-capita income and a large labor
surplus.1 As a result, household incomes in the PRC were a low 55.9% of GDP in

1There is a seeming contradiction between the observations that migration restrictions led to more capital-
intensive investment than otherwise should have been the case, while those same restrictions did not increase pressure
on urban wages. This was due in part to the ability of urban employers to draw on a large pool of urban women workers
who had not previously been employed; but to the extent there was wage pressure, the government could have simply

UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 5

1981.2 The freeing up of migration beginning the 1980s made it even easier for
enterprises to hold down wages despite a loosening of government wage controls.
En 2012, compensation of employees was still only 51.5% of GDP, although if
household property income were added to the 2012 total, the share would probably
not have declined.3

Household savings had been low in 1981 but has risen substantially with a
further reduction in consumption demand. One indicator of the rise in household
savings rate is the accumulated bank deposits of households. Such deposits were only
29.5% of annual household income in 1981, but amounted to 154.3% of household
income by 2012, when households also had more places other than bank accounts
to invest their savings.4

The solution to raising household consumption as a share of GDP is to raise
household incomes as a share of GDP and reduce the average household saving rate.
The government for a number of years has wanted to achieve a higher household
consumption rate, but this is difﬁcult to do. Incomes are now largely determined
by market forces and the main way for income share to rise is for wages to rise
faster than GDP. As Cai and Du (2011) and others have shown, wages of unskilled
migrant workers do seem to be growing faster than GDP now and are catching up
with the wages of low-skilled registered urban workers.5 This wage acceleration
results mainly from the end of the growth of the total labor force due largely to the
one-child policy and even more to the drying up of the rural labor surplus. Surveys
have shown that most of the registered rural labor force between the ages of 18 y
40 have already left farming and taken up urban jobs.

Future rural-to-urban migrants will come mainly from the children left behind
in the village whose parents have taken up work in the cities. They will likely leave
the village as soon as they complete their education and reach working age, pero
the number of these migrants will be smaller than in the past. Como consecuencia, el
productivity dividend from transferring rural workers in low productivity jobs to
higher productivity urban jobs will be much lower than in the recent past.

With this demographic situation, will wages continue to grow faster than GDP
for a decade or two and thus raise the share of household income in national income?

allowed enterprises to hire workers from the countryside. Both wages and the right to hire were tightly controlled by
el gobierno. De hecho, in the 1980s, the enterprises on their own began to contract with rural townships and village
enterprises to take over some of the more labor-intensive components of their products.

2The GDP ﬁgure for 1981 was taken from National Bureau of Statistics (2012). The household income share
was derived by adding the per capita income of the rural population multiplied by the total rural population to the total
national wage bill (mainly for urban employees). There were effectively no urban property incomes in 1981 (Estado
Statistical Bureau 1981, 429–31).

3Compensation of employees is different from total household income because households also had some
income from property in 2012 (although very little in 1981). In the US household income share in national income
era 81.9% (2012) o 70.5% of GDP but 22.8% of that household income came from proprietors income, rental
income, and dividends. The Chinese share from these latter sources would presumably be smaller.

4El 1981 data are from the Statistical Yearbook of China 1981 (State Statistical Bureau 1981, 408–409).
5Ver, Por ejemplo, Cai and Du (2011, 601–10).

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6 ASIAN DEVELOPMENT REVIEW

Will non-wage sources of household income also rise relative to wage income, y
will the non-wage income be distributed across a large proportion of the population
or just be highly concentrated among a few? I have no answer to these questions
and the data on relevant international experience is not readily available except for
a few high-income countries.

The main way that government policies can affect the growth of household
incomes is not through direct intervention in the labor market. The government can
increase rural spending out of existing income by taking over a larger share of edu-
cation and health costs. Whether this will increase nationwide expenditure, sin embargo,
will depend on how these extra payments are ﬁnanced. By freeing up bank interest
tarifas, the government can also directly inﬂuence household non-wage income, y
assuming that freed interest rates will be higher than the current repressed rates,
that will increase incomes of much of the population. Increasing direct subsidies to
the poor is another direct way of raising incomes. None of these measures by them-
selves are going to raise the share of household consumption in GDP dramatically,
but taken together, they could make a large difference.

The direct effects of raising the rate of interest on bank deposits by 2 por-
centage points could raise consumption by slightly over 1% of GDP, and using
government subsidies to raise the income of the bottom 10% of the urban popu-
lation and the poorest 20% of the rural population by 20% could raise household
consumption by over 2% of GDP, assuming that these subsidies were not ﬁnanced
through increases in taxes on households.6 Subsidizing rent payments made by
rural-to-urban migrants would not only lead to better housing for these migrants but
would also increase their income and consumption directly. How these latter two
steps can be accomplished and the unanticipated consequences they may generate
is a topic well beyond the scope of this essay.

Government measures designed to lower the rate of savings are more numer-
ous at least potentially. En general, there is much the government can do, y para
some degree is already doing, to remove part of the precautionary motive for a high
savings rate. Two major motivations for the high precautionary reason for savings
are the cost of health care and the lack of access by much of the population to
pensions. The government has introduced universal health insurance and is working
toward a national pension system, but these have a long way to go before they deal
with enough of the problem to have a major impact on the savings rate. National
health and pension insurance systems are complex and need to be designed care-
fully from the start. Getting rid of the hukou or household registration system and
its restrictions on migrants, Por ejemplo, is a good ﬁrst step, but one cannot simply
replace it by putting all of the migrants under the existing urban health and pension
sistemas.

6Calculations made by the author using data from household surveys published in the China Statistical

Yearbook 2013 (National Bureau of Statistics 2013).

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 7

Mesa 1. Foreign Trade Growth Rates (%)

Export Growth

Import Growth

1979–1989
1990–1999
2000–2007
2008–2013

25.0
23.5
24.5
6.6

25.1
20.1
23.3
8.7

Nota: Export growth rates in the last period may have been inﬂuenced by
currency speculation leading to over-invoicing of exports in order to move
foreign exchange into the PRC. These ﬁgures are for exports and imports in
current prices and are not deﬂated by price indices.
Fuentes: National Bureau of Statistics. 2014a. Zhongguo Tongji Zhaiyao
2014, (China Statistical Abstract 2014) pag. 90. Beijing: China Statistics Press.

If the PRC succeeds in raising the share of household consumption in GDP,
then consumption will be rising faster than GDP on a sustained basis. That in turn
will mean that the domestic market for household goods and services will also
be growing faster than GDP. That may not absorb all or even most of the unused
capacity among Chinese manufacturers, but it will help offset the fact that the
market for Chinese manufactured household goods will not be as hard hit by the
sharp slowdown in exports of these items in recent years. As we will discuss in the
next section, the recent slowdown has been dramatic and is probably irreversible.

III. The Slowing of Export Growth

For roughly 30 años, Chinese manufacturers not only enjoyed a fast-growing
domestic market as household incomes rose, they also beneﬁtted from an even faster
growth of export demand for their products. One reason for this sustained rapid rise
in exports was that the PRC started the reform period with an unusually low level
of exports. Exports in 1978 eran 4.5% of GDP using the ofﬁcial exchange rate to
convert exports in dollars into yuan.7 The reforms over time changed that situation
dramatically and exports rose to 24.1% of GDP by 2013. The rates of export growth
that produced this large rise in the export share are presented in Table 1.

En 1978, the PRC’s exports amounted to only $9.75 billion and formed a tiny share of world exports, pero en 2012, Chinese exports reached $2,209.6 billion, o
acerca de 11.1% of world merchandise exports (World Trade Organization 2012, 24).
This is the largest share of any country in the world—roughly equivalent to the
exports of the entire European Union (EU), a third more than the United States
(US), and more than double the export share of Japan.

Throughout the 1980s and 1990s, one could argue that the PRC’s export
statistics exaggerated the true size of the country’s export trade, as so much of that

7If the exchange rate of CNY1.7 per dollar overvalued the Chinese currency as seems likely, the share of

exports in GDP would be even lower than 4.5%.

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8 ASIAN DEVELOPMENT REVIEW

Cifra 4. Sector Exports as a Share of Total Chinese Exports

Fuentes: National Bureau of Statistics. Various years. China Statistical Yearbook. Beijing: China Statistics Press;
National Bureau of Statistics. 2014b. Statistical Communique of the People’s Republic of China on the 2013 National
Economic and Social Development, pag. 43. Available online at www.stats.gov.cn/english/PressRelease/201402/
t20140224_515103.html.

trade involved processing or assembly of components supplied by other economies,
notably the other major exporting economies in East Asia. In effect, these other
economies were producing a large share of the components in particular products and
then shipping them to the PRC for assembly and shipment to their ﬁnal destination.
The PRC’s processing trade as a share of total trade, sin embargo, peaked in 1999 en
57%, and by 2013, that share had fallen to 39% (Cifra 4).

Even if one eliminated all processing trade from the export ﬁgures in 2013,
the PRC’s exports would still nearly match the exports of Germany and the US and
would be far larger than those of Japan. The share of processing trade will probably
continue to fall as the PRC’s wages rise and the largely labor-intensive processing
trade moves out to lower-wage countries.

Export growth rates of the kind the PRC experienced prior to 2008 (well over
20% a year in nominal terms, tal vez 20% a year in real terms) are clearly not
sustainable, and the rates since 2008 are probably a more realistic guide to what is
possible going forward. World trade in the 8 years from 2005 a 2012 grew at 8% por
año, and the PRC’s rate might exceed that by a small amount if the country continues
to succeed in moving up to more sophisticated and higher technology exports. Si
the PRC’s exports were to grow at 20% a year over the next decade, the PRC would
account for one-third of the world’s exports, an enormous and unrealistic share.8

8This calculation assumes a Chinese export growth rate of 20% a year and a world export growth rate of 8%

a year.

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 9

Mesa 2. The Gross Capital Formation Rate and Capital–Output Ratio
of the People’s Republic of China

Annual Averages (% of GDP)

Capital–Output Ratio

3.88
4.41
3.92
5.26

33.3
38.1
41.8
47.1

1978–1992
1993–2002
2003–2007
2008–2013
GDP = gross domestic product.
Nota: Capital and the share of capital in GDP in Chinese ofﬁcial sources are calculated from
current price sources. When these ﬁgures are used to estimate the capital–output ratio, alguno
of the movement in the ratio can be attributed to differences in the price deﬂator for GDP and
that for capital. In these calculations, por lo tanto, constant price GDP data are used and the
percentage rate of capital formation was applied to those ﬁgures. The capital–output ratios
in the table use the total capital accumulated in 1978–1991 divided by the increase in output
in 1979–1992 (1992GDP–1978GDP), etc..
Fuentes: Author’s computations; National Bureau of Statistics. 2014a. Zhongguo Tongji
Zhaiyao 2014 (China Statistical Abstract 2014), páginas. 23–5. Beijing: China Statistics Press.

Japan’s share of world merchandise exports, by way of comparison, rosa
rapidly from the 1950s through the 1980s reaching 9.9% of the world total in 1993,
but that share has since fallen to about 4.5% (World Trade Organization 2012,
22). The PRC will have to vigorously upgrade the efﬁciency and quality of its
manufacturing sector (and also its service sector) if it is to maintain its share of
world exports. Continuing to increase that share will be an even bigger challenge.

A slowdown in export growth, sin embargo, does not necessarily mean that GDP
growth would also slow down. A decline in net exports (exports minus imports)
would mean a decline in aggregate demand, and hence GDP growth, other demand
variables staying the same, but a decline in export growth rates alone could involve
simply a shift in production to other items in demand. The impact on GDP growth
depends on a further assumption that it is much easier and more proﬁtable (es decir.,
provides a higher rate of return) to expand existing production and market share
than it is to develop new products of greater technical sophistication and sell them
against established ﬁrms in those sectors. The PRC is succeeding in doing this, pero
at a much slower pace than was the case with labor-intensive products where the
country in the past had a large cost advantage over most competitors.

IV. The Rising Share of Investment in GDP Expenditure

The PRC’s rate of capital formation as a share of GDP has been rising steadily
since the beginning of the reform period in 1978 from a base level that was already
high compared with other developing economies as a result of investment increases
in the pre-reform period. The data for the reform period are presented in Table 2.

By way of contrast, gross capital formation in Taipei,China peaked at 32% de
GDP in 1979–1981 and that in the Republic of Korea peaked in the 1990s at 37%,

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10 ASIAN DEVELOPMENT REVIEW

a decade that most analysts feel saw a poorly thought-out investment acceleration
by many of the large companies (chaebol). If the increase of 8.9% in the capital
formation rate in the PRC from 1993 a 2002 y 2008 a 2012 had not occurred, el
PRC’s GDP growth rate after 2002 would have been 1 percentage point lower (9.4%
versus 10.4%) even if the increase in capital formation had a zero rate of return.
The assumption of a zero rate of return on the additional capital formation in the
latter period may not be far off reality given the large increase in the capital–output
ratio in the period 2008–2012. The higher capital–output ratio in 1993–2002 than
the periods before and immediately after probably reﬂects the unusually (up to that
tiempo) high rate of investment in 1993–1995 (average per year of 41.1%) that resulted
in a high rate of inﬂation (for the PRC) de 18.6% per year during those years.

Claramente, part of the story of the PRC’s slowdown in GDP growth can be
attributed to the rising inefﬁciency of investment. We shall take some initial steps to
try to understand the sources of that inefﬁciency, but a full accounting would require
at a minimum a sector-by-sector analysis of the sources of this rising inefﬁciency.
That is far beyond what can be undertaken in this short essay.

Outright private and self-employed investment is only 27.5% of the total (en
2012) while enterprises that are fully state owned account for 25.7%. Sin embargo, allá
is another 33.1% made by shareholding and limited liability enterprises, a substantial
share of which (probably somewhat over half) are state controlled (National Bureau
of Statistics 2013, 155–56). There are published data for the return on assets in the
industrial sector, and these indicate that the rate of return in private industry has
actually risen substantially since 2004 de 10% a 14%. State-enterprise proﬁts in
contrast did rise slightly from 2002 a 2007 but only from 3% to just over 6% y
then fell back to 4%–5% (Lardy 2014, 126). It is questionable, sin embargo, si
even this low rate of return in the state-owned and state-holding sector reﬂects the
real return on assets for most state enterprises, como 60% of those proﬁts are in the
highly regulated gas, oil, coal, tobacco, and electric power sectors (National Bureau
of Statistics 2013, 485–87).

En esta sección, we shall make a few comments about the impact on invest-
ment of the PRC’s gradual shift toward a service-sector economy followed by brief
comments on certain industrial sectors. Sin embargo, our focus will mainly be on two
areas of investment where the PRC is probably running into decreasing returns be-
cause the demand is not there to justify sustaining the rate of growth of production
in these sectors. The two sectors are real estate, particularly housing, and certain
infrastructure investments.

As the economy shifts away from manufacturing toward services, the role
of investment in the economy can be expected to decline. One reason for this is
that manufacturing, particularly for middle-income and higher-income countries is
typically more capital intensive than most services other than transport. Wholesale
and retail services are labor intensive, while education, health care, and ﬁnancial
and business services are human capital but not physical capital intensive. En el

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 11

case of the PRC, the ratio of investment in ﬁxed assets to increases in output, para
ejemplo, era 3.1:1 during 2010–2011, while that in services (minus real estate and
transport) era 2.3:1.9 De este modo, if the share of services rises while that of industry falls,
assuming a constant rate of GDP growth, there will also be a decline in the share
of investment in GDP which will have to be made up by increasing consumption.
Transport and real estate will be discussed separately below.

Some of the investment in industry in the PRC during the most recent few
years has almost certainly been excessive. This is most obviously the case with the
extraordinary expansion of the steel and cement industries during this period. Estos
industries continued to expand capacity to meet immediate high demand notably
from housing and transport that, as we shall argue below, was likely to level off or
decline in the future.

The PRC, as of 2013, produced 48.5% of the world’s crude steel and 59.3%
of the world’s cement in 2012.10 It is widely believed that state enterprises, as part
of government efforts to stimulate the economy, expanded capacity right through
the world recession, whether or not domestic and export demand for the output
of those assets was likely to grow at a rate that would justify that investment.
An in-depth (sector-by-sector) analysis of the investment behavior of state-owned
industrial enterprises is beyond the scope of this essay, but clearly, these enterprises
are prone to political intervention, which helps explain why their rate of proﬁts is
so far below that of the private sector.

One can say more about the likely future investment in three broad sectors
of the economy: real estate, including residential housing; transport; and water and
the environment. These three sectors have by far the largest investments other than
manufacturing. Together they constituted 42.8% of all investment in ﬁxed assets in
2003 y 2012. The ﬁrst two are likely to slow down and contribute to a slower GDP
growth overall, while water and the environment are likely to see further investment
growth, possibly a very large rise.

V. Housing Supply and Demand

Investment in real estate in general and in the construction of residential
housing has played a major role in the overall rise in investment as a share of GDP,
particularly beginning around the year 2007. Real estate and housing investment

9Transport was eliminated because it is highly capital intensive and will be discussed below. Real estate
was eliminated from the service sector because the data for real estate services in GDP include only such items as
real estate company rental services, while the ﬁxed asset investment in real estate enter GDP through other sectors
(notably but not exclusively via construction). The asset/value-added ratios are calculations of the author from data
published in the China Statistical Yearbook 2013 (National Bureau of Statistics 2013, 54 and 159–61. The ﬁgures
are not strictly speaking capital–output ratios because the ﬁxed asset data involves some double counting whereas the
output data are value added.

10Data obtained from the World Steel Organization (available online at www.worldsteel.org, accedido 23

Enero 2014) and the European Cement Association (2014).

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12 ASIAN DEVELOPMENT REVIEW

has in turn been a major source of demand for cement and steel. It is not possible
to say much about the future growth of investment in ofﬁce buildings, as it depends
on sources of demand that are not transparent, but it is possible to say something
systematic about the demand for residential housing.11 For much of the past 3
décadas, urban housing construction was ﬁlling the gap in housing supply resulting
from almost complete neglect of housing construction during the 2 decades prior to
the beginning of reforms in 1978. Por 1978, the average per-capita housing space in
urban areas was 7.2 square meters (m2). Por 2010, this ﬁgure had risen to 31.6 m2
and it has continued to rise slowly since then. The major question now is whether
the current rate of housing construction that ﬁlled the gap left by decades of neglect
is sustainable over the next 1 a 2 décadas.

Before addressing this question, sin embargo, the nature of housing demand in
the PRC needs to be clariﬁed. Some of the demand was created by local governments
and developers building houses that were not sold to consumers or even to investors
and thus remained empty, although that was not the major reason for the large
demand for housing that occurred in the late 1990s and after 2000. If households
were purchasing housing out of current income, a decision to reduce this expenditure
would simply involve increased expenditure on something else and the growth rate
in aggregate demand would be unaffected. In the PRC, sin embargo, virtually all urban
housing prior to the late 1990s had been owned by the state and both by state-
owned enterprises or the government more directly. When housing was privatized,
it was sold mainly to current occupants at prices far below market value. Urban
residents thus received a large wealth windfall when they sold their property at
market prices, and the windfall was further magniﬁed by rapidly rising housing
prices. Many then proceeded to use that windfall to purchase much better housing
than they could previously afford.12 This was, in short, a one-shot major increase
in demand that cannot be repeated because most housing other than that for low-
income urban residents had already been privatized. Housing demand going forward
will therefore have to depend mainly on household current income plus whatever
mortgage borrowing they can negotiate, which itself depends to a large degree on
estimates of their current and future income.

The data on annual rates of completed housing are presented in Figure 5,
while the shares in GDP of investment in the completed housing through time is
presented in Figure 6.

11Demand for government ofﬁce buildings, Por ejemplo, depends to a large degree on whether government
ofﬁcials in a decision-making position want better ofﬁces or larger ofﬁce space, and that may have little relationship
to the rise in the number of government ofﬁce workers or other easily measurable reasons for building new ofﬁces.
Private ofﬁce space will also depend on such things as the size of corporate proﬁts or the desire of a chief executive
to move ofﬁces closer to where he lives, among many other impossible to forecast motivations.

12Many of these transactions involved government decisions to demolish the existing housing after privati-
zation that would have involved compensation to the owners. Anecdotal evidence suggests that this compensation
was closer to market values than to the original highly subsidized purchase price. En algunos casos, those forced out of
particularly valuable locations could extract a kind of monopoly rent over and above the normal price for that land.

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 13

Cifra 5. Residential Housing Completed Annually

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Fuente: National Bureau of Statistics. 2013. China Statistical Yearbook 2013, páginas. 183 y 195. Beijing: China Statistics
Prensa.

Cifra 6. Residential Housing Expenditure as a Share of GDP

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Nota: The urban ﬁgure was derived by subtracting the rural ﬁgure from total investment in residential construction.
The residential construction value ﬁgures used here are gross expenditures not including housing repairs and are
different from housing investment value-added expenditure in the national accounts. De este modo, the share in this ﬁgure
overstates the contribution of real estate expenditures to GDP by a substantial margin. The trend, sin embargo, should not
be substantially different if we had data on value-added expenditure on residential housing.
Fuente: National Bureau of Statistics. 2013. China Statistical Yearbook 2013, páginas. 154–95. Beijing: China Statistics
Prensa.

14 ASIAN DEVELOPMENT REVIEW

During the past 27 años, the PRC constructed 25.9 billion m2 of housing of
cual 11.6 billion m2 was constructed in urban areas with 39% of the urban total
(4.55 billion m2) constructed during the 5-year period 2008–2012. Desafortunadamente
we do not have a reliable estimate of the total urban housing stock. Using census
datos, Yao (2013b, 1) estimates that the total urban housing stock in 2010 era 16.8
billion m2. The National Bureau of Statistics (2013, 11) sin embargo, reports a ﬁgure of
31.6 meters per capita for urban areas which, if multiplied by the ofﬁcial ﬁgures for
the urban population in 2010, would imply a housing stock of 21 billion m2 (23.4
billion m2 in 2012).13 De este modo, somewhere between a ﬁfth and a quarter of all housing
in use in 2012 was built during the 5 short years.

This level of housing construction in value terms over the past 7 años
(2007–2012) accounts for a substantial portion of the increase in gross capital
formation in the PRC over those years. Con 2005 as base year, the share in GDP of
housing investment rose from 8.3% a 12.4% of GDP, the latter ﬁgure an unusually
high level even for rapidly growing developing countries. The entire increase was
accounted for by investment in urban housing, not rural housing.

To understand whether this level of housing construction is sustainable, uno

must make assumptions about the following:

(i) The rate of demolition of the existing urban housing stock. Demolition is
different from depreciation since the latter includes the deteriorating quality
of existing housing in the absence of upkeep and repairs. No attempt here
will be made to estimate what these upkeep and repair expenses might be,
although they will no doubt be substantial.

(ii) The rate that housing stock will be provided for new urban residents and for
existing urban residents who do not currently have even minimally adequate
urban housing. These comprise mainly migrants from the rural areas who are
already in the cities or are likely to move to the cities over the next 1 a 2
décadas.

(iii) The expansion in the existing housing stock to accommodate increased de-
mand for larger homes by the existing registered urban population as their
incomes continue to increase.

(iv) The degree to which families own more than one dwelling and the degree to
which these are vacation homes designed for seasonal use or simply a form
of investment. If houses are mainly for investment, it then becomes important

13Housing space per capita sometimes includes only the direct living space of the family, while it can also
include such things as hall space in apartment buildings. In that respect, what the ﬁgures reported here cover is
unknown to this author.

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 15

to know what percentage of these investment properties is unoccupied. If the
unoccupied share is very large, that alone would be evidence that the real
estate market had been overbuilt and the bubble would be likely to burst.
Desafortunadamente, we do not know of any estimates of the occupancy rate of
Chinese urban housing.

One serious estimate of the rate of demolition of existing housing is again
by Yao (2013b, 2). She estimates the rate of demolition during 2006–2010 to be
370 million m2 per year. If this rate were to continue through 2020, there would
be little or no housing by that date in urban areas built before 1990.14 That may
be a possibility but is it likely? Tearing down apartments with the shared kitchens
and bathrooms that were common in pre-1980 housing has largely been completed
outside of hutong areas in Beijing and similar places. For illustrative purposes below,
I will assume a demolition rate of 200–300 million m2 per year, a ﬁgure still double
or more the ofﬁcial rate during 2003–2004.

Most rural-to-urban migrants at the beginning of the second decade of the
21st century lived in very crowded substandard conditions ranging from tents to
dormitories to rental space with as many as six to eight people per room. Mayoría
migrant households would probably be in the bottom 40% of the urban population if
we had a measure of their income. The average annual income of urban households in
the second 20% of the urban population, reckoned from the bottom, was CNY50,000
($8,000). Those in the bottom 20% earned CNY27,000 ($4,400).15 People at this
level of income cannot afford to purchase a 90 m2 apartment at CNY490,000
($79,000), the average sales price of commercial real estate in all of the PRC. Alguno, sin embargo, might be able to purchase a smaller apartment 30 or more years old particularly in the smaller cities. Most housing for recent migrants, sin embargo, will have to be public housing with subsidized rents. The actual construction rate for migrant housing, por lo tanto, is likely to be determined more by government policy than just by migrant demand. According to the 2011 report of the National Population and Family Planning Commission, the number of migrants at that time was 221 millón, y 76% of those wanted to live permanently in cities.16 Another 300 million are expected to move from rural to urban areas over the next 30 años. These ﬁgures imply that there will be a need for housing for roughly 370 million people over the next 2 décadas. That suggests an immediate need for the 170 million people who want to remain permanently in the cities now plus 10 million more each year. Assuming 14This calculation is also based on Yao’s (2013b) estimate of the age structure of the housing stock in 2010. 15These ﬁgures are based on the per capita disposable income of urban households in these groups multiplied by the number of people per household. The US dollar ﬁgures assume an exchange rate of CNY6.2 per dollar. 16“Mass migration, major problems,” Chinadaily.com.cn 10 Octubre 2011. El 221 million ﬁgure is from the 2010 census and is for residents whose household registration is in a different place other than in the same city. It thus includes some people who are not rural-to-urban migrants. l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 16 ASIAN DEVELOPMENT REVIEW Table 3. Annual Demand for Housing (Million m2) Demand Replacing demolished housing Housing for migrants Improved urban housing Total annual demand Source: Author’s calculations. Size 200–300 370–493 120–290 690–1,083 a family size of 3 and an apartment size of 80 m2, housing construction for this purpose would average 493 million m2 per year (somewhat more in the early years because of the backlog of demand and somewhat less in later years). If the average family size was 3.5 and the apartment size was 70 m2, the ﬁgure would be 370 million m2 per year. The average cost of urban housing construction per square foot in 2012 was CNY2,184, not including the purchase of land. If that were the cost of construction of public housing, perhaps adding some payment for land, the cost for public housing would come to CNY808 billion to CNY1,077 billion (1.6% a 2.1% of GDP in 2012, a lower percentage in later years). Estimating the pace at which the PRC’s existing urban residents will up- grade their housing, presumably mainly by buying new, más grande, or higher quality apartments, is very difﬁcult.17 The average annual increase in the size of the PRC’s apartments per household has generally ranged between 0.5 m2 to a bit over 1.23 m2 per year since 1992 (Yao 2013a, 1). The lower ﬁgure implies a ﬁgure of 120 million m2 per year and the higher ﬁgure about 290 million m2 annually. Putting these speculative estimates together, one gets a total annual demand of around 690–1083 million m2 per year over the next 2 décadas (Mesa 3). It should be underlined that this estimated range assumes a robust program to house rural-to-urban migrants. Without such a program, the projected demand for housing would be much lower. As of 2014, the government has yet to make a commitment to provide public housing for migrants of anything like this magnitude. Finalmente, it needs to be emphasized that this speculative forecast is a long-term forecast and not a comment on whether or not the housing market of 2014 is overbuilt or housing prices are too high. En 2014, there is probably still a demand for housing as an alternative investment to putting money in banks at low interest rates even if the housing remains empty for long periods (but demand of this sort will evaporate if prices begin to fall). This source of demand should also fall as individuals in the PRC are allowed to invest in a wider range of assets (including overseas stock markets), and interest rates on bank deposits rise to market-determined levels. It is also the case that the urban population had been growing during the past 5 años (2008–2012) at a little over 20 million people per year, double the rate of 17People could also expand the size of their existing housing by buying out and remodelling the interiors of neighboring apartments. l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 17 the projections used above, although some of this presumably involves redrawing of urban boundaries rather than actual new migrants. Ofﬁcial statistics indicate that urban employment increased by 12.5 million people annually over the same period (2008–2012). Similarmente, employment in the secondary and tertiary sectors rose by 12.7 million per year. Employment in the primary sector (mainly agriculture) has fallen by roughly 10 million per year. Population growth is now under 0.5% per year or 6.5 million people per year (down from 13 million per year in the 1990s). It is the smaller ﬁgure of 6.5 million that is an indicator of the size of the pool of labor in the countryside that will be available to move to the cities 10 a 15 years from now (or will have already moved as children with their migrant parents by then).18 The overall conclusion is that for the next several years there will probably be enough demand to sustain urban housing investment at a level comparable to that of the recent past of around 1 billion m2 per year (or somewhat less), but it seems unlikely that demand will grow further. Housing investment as a share of GDP should decline as GDP rises. This is very different from the most recent decade (2003–2012) when investment in urban housing rose by 23% per year and completed housing ﬂoor space rose by 6% per year. VI. Transport Investment and GDP Growth As in the case of housing, the PRC following the Soviet model neglected transport investment throughout the centrally planned command period prior to 1978. Since that time, a substantial share of investment has gone to the sector, but it was only in 1998, during the Asian ﬁnancial crisis, that construction of a high-speed highway (expressway) system began to expand by several thousand kilometers (km) a year, accelerating to nearly 10 thousand km a year during 2009–2013. That length, as of the end of 2013, reached nearly 104.5 thousand km (65.3 thousand miles), longer than the US interstate highway system (46.9 thousand miles). At roughly the same time, the Chinese government began making large in- vestments in new airports for provincial capitals and other major cities, y 5 years to a decade or more later, large new terminals were opened at Baiyun Airport in Guangzhou, Pudong Airport in Shanghai, and Capital Airport in Beijing. Más que 40 new airports elsewhere are in the current ﬁve-year plan. The PRC’s ﬁrst major high-speed railway, from Beijing to Tianjin, began operating in 2008. Since then, new lines have been opening throughout the country and the length operating in 2012 was just over 10 thousand km with an additional 1,672 km added in 2013. With plans to complete four north–south lines and four east–west lines linking all 18For more in-depth analyses of the state of the Chinese urban housing market in 2014, see Yao and Gatley (2014), and Yao (2014). l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 18 ASIAN DEVELOPMENT REVIEW of the most populated parts of the country, the total length is expected to reach 18,000 km by 2017.19 A central question about this investment is whether it is being built in response to demand or well ahead of demand. Within the large coastal cities such as Beijing and Shanghai, there is little doubt that construction of highways has been meeting an immediate high level of demand. The expressways around Beijing and in the lower Yangtze delta between Nanjing and Shanghai are jammed with vehicles most of the time. The total number of passenger vehicles plus trucks in the PRC was roughly 120 million in 2013, while the US, with a somewhat shorter expressway system, had 254 million registered passenger vehicles plus large numbers of trucks. En 12 million new passenger vehicles and 10 million other motor vehicles produced a year (the level of production in 2013), the PRC would catch up with the US in terms of number of vehicles in roughly another 7 years or a bit longer if older automobiles and trucks going out of service are taken into account and even longer if many of these vehicles are exported.20 Furthermore, the PRC also has a far superior passenger rail transport system to that in the US, and that has also been expanding. Not many Chinese today, unlike Americans, travel long distances by automobile, although that is much less true of trucks, so it will be more years before the PRC’s mileage used per vehicle matches that of the US. dicho eso, the PRC’s population density alone will almost certainly force the country to follow a path different from the US. If the PRC, as per capita incomes rise to high income levels, were to duplicate the automobile ownership and use of the US, the country would have over a billion passenger vehicles on its roads mostly in an area that is only modestly larger than US territory east of the Mississippi River. A more relevant comparison would be Europe, where there are over 300 million vehicles and only 66,000 km of “motorways” (in the EU plus members of the European Free Trade Association) but with a good high-speed rail system.21 The PRC’s passenger rail volume has increased by only 3.1% per year since 1990, a pesar de, the rate increased after 2002 a 6% per year, in part no doubt due to rising incomes. Civil aviation carried only 17% of the volume of passengers as railroads in 2012, and the long-distance rail lines to a degree compete with domestic air travel. At the time that this is being written, sin embargo, both continue to show robust growth. This discussion suggests that the demands on trafﬁc capacity of all kinds may not justify continued investment growth in this area at the accelerated pace of the 19Available online: www.travelchinaguide.com/China-trains/high-speed/ 20To get a full picture of future demand for use of highways, one would have to get an estimate of exports and imports of vehicles plus the number of trucks on the roads and the average distance travelled by each vehicle over a year. 21This estimate is calculated using data from European Road Statistics 2011 (European Union Road Federation 2011, 16–17). l D o w n o a d e desde h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 19 Cifra 7. Investment in Transport and Telecommunications l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 Nota: The data were divided by the price index for investment in ﬁxed assets to convert the reported data to constant 2012 prices. Total ﬁxed asset investment is more inclusive than capital construction investment but data broken down by sector are only available after 2003. Fuentes: National Bureau of Statistics. 2013. China Statistical Yearbook 2013, páginas. 160, 347, y 2003, pag. 197. Beijing: China Statistics Press. past decade. The data for total investment in transport and communications in real terms are presented in Figure 7. Investment in transport and telecommunications over the period 2004–2012 grew at an average annual rate of 14.3% per year, substantially faster than the rate of growth of GDP; the rate of growth during 1996–2002 was somewhat slower at 12.1% per year. Sin embargo, the earlier growth was only slightly faster than GDP growth. In the more recent period, the share of transport and telecommunications investment in GDP rose from 4% en 2003 a 7.3% en 2010 as the stimulus investment took effect, but fell back to 6% en 2012. También, involved in the 2010–2012 period was the temporary slowdown in railroad investment due to scandals in the railway ministry. Is an investment in transport of 6% of GDP likely to continue indeﬁnitely into the future? Even if it does, the rate of increase in investment would likely fall to the rate of growth of GDP. Gross investment, to be sure, will grow partly because recurrent costs for system maintenance will rise rapidly as the transport system ages, but it is net investment that will drive increases in GDP. We have also made no attempt to estimate the portion of investment in these ﬁgures that is set aside for telecommunications rather than transport. The likely increase in demand for transport services going forward, sin embargo, does not appear to justify continued expenditures at the current level. This conclusion, sin embargo, is somewhat speculative since it is not based on careful analysis of the Chinese transport systems, dónde 20 ASIAN DEVELOPMENT REVIEW Figure 8. Investment in Water Conservancy and the Environment l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 Nota: The data were divided by the price index for investment in ﬁxed assets to convert the reported data to constant 2012 prices. Total ﬁxed asset investment is more inclusive than capital construction investment but data broken down by sector are only available after 2003. Fuentes: National Bureau of Statistics. 2013. China Statistical Yearbook 2013, páginas. 160, 347, y 2003, pag. 197. Beijing: China Statistics Press. ﬁlling key gaps in that system would or would not be highly productive, but such a study is far beyond the scope of this essay. VII. Water Conservancy and the Environment Investment in water conservancy and the environment has followed a path very similar to investment in transport up through 2013. Slower but substantial growth before the 21st century was followed by accelerated growth faster than the rate of growth of GDP after the year 2000 (Cifra 8). The prospects for future growth in investment in water conservancy and the environment, sin embargo, are different from those for transport. The northern part of the country reaching from Shandong Province and the North China Plain to Gansu and Qinghai Provinces in the northwest has a severe shortage of water relative to the region’s demand for water.22 The demand for water in the north is outstripping supply. Como resultado, the main sources of water in the north, the aquifers under the North China Plain and elsewhere, are being mined, 22West of Qinghai and Gansu is mostly desert except for the oases along the historical silk route and the far western portions of Xinjiang, but there has never been a realistic prospect for bringing water to this mainly desert region. Similarly the far northern part of the northern region (the northern part of Inner Mongolia) is the Gobi desert. UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 21 leading to a steady fall in the level of these aquifers and the possibility that they could dry up. The water problem has been recognized for some time now, and the PRC over the past decade has invested well over CNY400 billion (encima $70 billion) en
the largest single project, the transfer of water from the Yangtze River to the dry
northern provinces. The project is designed to move water along three routes to the
north, and the eastern-most route has already begun moving water northward. El
central route is nearing completion, but the western route is still in the planning
stage. Even more ambitious efforts to move water from further south, incluido
from rivers that are also important to Southeast and South Asia, are being talked
acerca de. Whether these future possibilities are feasible, and even whether or not the
diversion of the Yangtze River water to the north will solve more problems than it
creates, remains to be seen.

Large-scale water conservancy investments, por lo tanto, are likely to continue
for some time. Over time, it will become increasingly apparent whether continued
investments to move water northward will lead to an unacceptable fall in the level of
the Yangtze River itself and its tributaries. If further diversion of water is required
and economizing efforts in areas of water shortage reach their limits, el principal
alternative would be to begin shifting industries and urban centers to the south. A
some degree, this shift to the south could occur without government direction as
individuals and enterprises move to areas where water is more plentiful.

Water conservancy is a kind of environmental investment, but while much
of the PRC’s water is severely polluted and some feel the Yangtze diversion could
make it worse, the issue of investment in the environment goes far beyond water. El
air quality problems of many of the PRC’s major cities are well known. The PRC’s
contribution to greenhouse gases and climate change is also widely discussed. El
data on investment in ﬁxed assets, sin embargo, probably do not capture much of the
current investment that is going into efforts to curb the increases in air and water
pollution. Much of the investment in dealing with air pollution would normally show
up in the accounts of industrial enterprises and in such areas as the higher cost of
motor vehicles due to emission controls.

While it is not known, at least to the author of this essay, how much is being
spent in the PRC at present to improve the environment, there is little doubt that
large sums will have to be spent in the future, especially if the PRC gets serious
about reducing its impact on the rise in greenhouse gases. The only way the PRC can
have a major impact on its contribution to greenhouse gases is for it to dramatically
reduce its dependence on coal. The PRC’s coal production since 2000 has increased
at a rate of 7.8% per year, and the share of coal in energy consumption has only
declined from 69.2% a 66.6% over that period (2000–2012). Energy from gas,
hydropower, nuclear, and wind power together rose from 8.6% a 14.6% of total
energy consumption, with rapid increases in the imports of petroleum making up
the difference of 19% a 21% of energy consumption.

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22 ASIAN DEVELOPMENT REVIEW

Even these modest structural changes in energy demand have involved large
investments. More dramatic changes in coal use, to say 50% of energy consumption,
would involve enormous investments in gas pipelines, hydroelectric dams, y
nuclear power plants, particularly if energy consumption continued to grow. Coal
still accounts for 37% of electricity produced in the US, and its declining use is still a
politically contentious issue. The much larger investment (particularly as a share of
PIB) needed to bring coal use down in the PRC will also generate resistance from
a wide variety of sources. Estimating the likely size of that investment, sin embargo, es
well beyond what is possible in this essay.

Reducing coal consumption is also an essential component for reducing air
pollution, but a great deal can be accomplished in that area by reductions in particular
uses for coal (for household heating use for example) rather than an overall sharp
decline in use, and that has been occurring in the PRC. Air pollution can be addressed
through a range of other investments as well. Some of these methods such as closing
small inefﬁcient power plants and replacing them with larger more efﬁcient plants
were tried with some success during the 11th ﬁve-year plan. A careful estimate of the
impact of this effort and of other hypothetical policies such as a carbon tax suggests
that the impact was well under 1% of GDP, and when health and other beneﬁts were
tenido en cuenta, that impact was positive, not negative (Nielsen and Ho 2013).

We do not have an estimate of the up-front costs of ending air pollution
en general. From the experience of both Japan and the Republic of Korea, sin embargo,
we do know that serious air pollution can be eliminated without having a clearly
noticeable impact on GDP, although neither used anything close to the amount or
share in total energy of coal consumed by the PRC. Whatever that precise up-front
cost ﬁgure may be, given that the PRC will have to maintain an abnormally high rate
of investment for at least the next few years to fully employ its resources, a strong
case can be made for shifting investment equivalent to several percent of GDP to
dealing with air and water pollution. Much of that investment would be done by
the polluting enterprises themselves, and the efﬁciency of that investment would
probably be higher if an increasing number of these enterprises were under private
management.

VIII. The Transition from a Manufacturing Economy

to a Service-Based Economy

As per capita incomes rise, the structure of the economy initially experiences a
shift in production and employment from the agriculture sector to industry, but when
per capita incomes rise further, there is another shift from industry to services—that
es, industry’s share in GDP and employment levels off and begins to decline, mientras
the share of services in GDP and employment continues to rise. The latter shift
occurs at anywhere from $8,500 per capita GDP (PPP in 2000 prices) to a little over l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 23 Cifra 9. Sector Shares in GDP l D o w n o a d e d f r o m h t t p : / / directo . mi t . / e d u a d e v / a r t i c e – pdlf / / / / / 3 2 1 1 1 6 4 1 0 9 4 a d e v _ a _ 0 0 0 4 0 pd . f por invitado 0 7 septiembre 2 0 2 3 Fuente: National Bureau of Statistics. 2013. China Statistical Yearbook 2013. Beijing: China Statistics Press. $20,000.23 The shift of Taipei,China and the Republic of Korea’s began in the late
1980s at the low end of the per capita income spectrum, while that of Japan began
in the middle of that income range in the early 1970s. More generally, this shift
toward services has occurred on average at a lower level of per capita income since
the 1980s than before that time, though there are numerous exceptions.

The PRC’s shift out of agriculture into industry began in the 1950s and
accelerated after 1984, but the share of industry in GDP and employment leveled off
in the mid-1990s; that share in GDP began to slowly decline around 2008 when per
capita GDP was roughly $7,000–$8,000 depending on whose PPP income estimates
are used.24 Employment in the secondary sector, sin embargo, has continued to rise,
although much of that rise is due to increasing employment in construction, no
manufacturing. The data are presented in Figures 9 y 10. While one cannot be
certain that this decline will not be reversed in future years, the PRC appears to be
in the early stages of an economy dominated increasingly by the service sector.

The relative shift from industry to services is sometimes referred to as dein-
dustrialization, but in almost all economies, industrial production, although not

23These ﬁgures are for the shift in employment away from industry, but the shift in production typically begins
at roughly the same time. The shift away from agriculture begins early in development and continues until very high
income is reached, and so with the share of industry also falling, the service sector is therefore growing faster than
PIB. See Eichengreen, Perkins, and Shin (2012, 87).

24The PRC’s agricultural reforms in the early 1980s led to a high rate of growth in agriculture for a brief

period and agriculture’s share of GDP actually rose.

24 ASIAN DEVELOPMENT REVIEW

Cifra 10. Sector Shares in Employment

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Fuente: National Bureau of Statistics. 2013. China Statistical Yearbook 2013. Beijing: China Statistics Press.

employment, continues to grow. The service sector, sin embargo, typically grows at
slower rates than the double-digit industrial and manufacturing growth rates one
sees in fast-growing countries in the early stages of development. In low-income
and middle-income countries experiencing near double-digit rates of growth, eso
high rate of growth is largely driven by industry, and particularly, manufacturing.
There are exceptions, such as India, where high growth has been driven by the
service sector, but those exceptions in low-income and middle-income countries are
rare. In the PRC, sin embargo, the service sector grew considerably faster than GDP
(10.8% per year from 1978 a 2012, versus 9.8% per year) and almost as fast as
industria (11.35% per year). The share of services in GDP thus rose steadily from
23.9% of GDP in 1978 to an average of 34.1% in the 1990s and an average of 41.7%
from the year 2000 onwards. Industry’s share in GDP rose rapidly up until the early
1990s, but the share leveled off at roughly 41% for the next 16 years then began to
decline beginning in 2009 until 2013.25

The PRC’s early rapid increase in the service sector, sin embargo, was not typical
of low-income and lower-middle-income countries. The rising share of services
during that earlier period resulted from the fact that services of all kinds during
the centrally planned command era prior to 1978 were systematically neglected.
Wholesale and even much of urban retail trade had been dominated by a few

25The share of manufacturing and industry in GDP at the beginning of the reform period was well above 41%
but this reﬂected the unusually high industrial prices and low agricultural prices then still in place, from the command
economy era before 1978.

UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 25

state-run enterprises, there were few restaurants, banking services for the public
were minimal, and investment in transport was kept to a minimum. Services in the
Soviet-type system were not included in what the Chinese called national income
but which outside economists usually referred to as net material product. Investment
in services thus did not contribute much to what was considered at that time to be
economic growth.

This situation changed rapidly after 1978. Retail trade in rural and urban
areas grew rapidly and was increasingly in private hands. New hotels and restaurants
were opened in large numbers, the banking system was gradually modernized, y
other ﬁnancial institutions were created and expanded. Education and health care
expenditures also rose rapidly. Por 2014, the PRC’s service sector appears to have
caught up with the level and sophistication of the average middle-income country.
Services, sin embargo, as already noted, do not typically grow at near double-digit rates.
We do not fully understand why this is the case but there is a clear difference between
increasing, say steel production, de 100 million tons to 300 million tons in a decade
or two than from training the workers needed for expanding labor-intensive ﬁnancial
or business services threefold. Wholesale and retail trade, and transport services will
grow primarily with the rate of growth of traded goods (this includes slower growing
agriculture as well as industry) and with the rising rate of urbanization, among other
cosas. Whatever the explanation offered for why services grow less rapidly than the
double-digit increases that sometimes characterize industry, the PRC’s shift toward
services in the future should also contribute to a slowing of the GDP growth rate.26
It is also important to note here that productivity in services is only likely to
grow rapidly if much of the growth and investment in this sector is increasingly dom-
inated by the private sector. The large state-owned banks, Por ejemplo, performed
particularly badly when they were ﬁrst separated from the Soviet-type mono-bank
system of the pre-reform period, and while the improvement in performance since
then has been considerable, political considerations in allocating credit, among other
problemas, still play too large a role. Tight regulation of the ﬁnancial system has also
led to the rapid expansion of a large shadow ﬁnancial system which is not really
effectively overseen by anyone.

In software development, e-commerce, and related areas, it is even more
difﬁcult to imagine the state playing a large and effective direct role. The state
abandoned much of its role in traditional retail trade early on in the reform pe-
riod. It is difﬁcult to identify any part of the service sector that would beneﬁt from
direct government control outside of areas such as welfare payments and other
areas where market failures make government control essential. Government regu-
lation is needed, notably of the ﬁnancial sector and to internalize to ﬁrms external

26In Eichengreen, Perkins, and Shin (2012, 36), a cross-country regression was run showing that the GDP
growth rate accelerates when the share of manufacturing rises and then levels off as the share of manufacturing. Él
then falls as services come to dominate.

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26 ASIAN DEVELOPMENT REVIEW

environmental diseconomies, but even in these areas, government regulation in the
PRC has too often been poorly designed and implemented.

IX. Impact of High Investment Rates on Total Factor Productivity

How will the impact of these various shifts in demand—for housing and
transport on the negative side and for the environment and consumer products on
the positive side—together with structural changes on the supply side (the shift from
manufacturing to services) affect the overall rate of growth? An alternative question
would be to ask what the impact on GDP growth would be if these structural changes
did not occur, but the analysis above has already made a strong case that the impact
on the GDP growth rate of no structural change would be negative.

One way to approach an answer to the ﬁrst question is to analyze the supply-
side problem of maintaining a high enough rate of TFP growth to ensure an annual
growth rate from 5% a 7%. It would then be desirable to breakdown the required
productivity growth by sector to take into account the impact of the structural
changes required in the future, but that is a difﬁcult challenge at best and far beyond
what is possible in this essay.

During the post-1978 economic reform period through to the middle of the
ﬁrst decade of the 21st century, the PRC experienced high TFP growth that accounted
para 40.1% of the growth rate of GDP in that period (Mesa 4). Put differently, if there
had been no TFP growth, the PRC’s GDP growth rate, other things being equal,
would have been less than 6% per year during 1978–2005. In the latter half of that
período, sin embargo, the growth rate of TFP fell to just over half of the previous 27 años.
As the capital output ratio continued to rise by 30% after that 27-year period and the
rate of investment grew to nearly half of GDP, the growth rate ﬁrst rose to 11.3%
per year but then fell to an average of 8.2% during 2011–2013. The trend during the
latter period was downward.

In a study based on data through 2005, Tom Rawski and I attempted to get
an understanding of how fast TFP would have to grow over the next 1 a 2 décadas
(2006–2025) for the PRC to maintain a given GDP growth rate (Perkins and Rawski
2008). A summary version of those estimates (speculations) is presented in Table 5.
These projections assumed that the rate of investment as a share of GDP would
actually decline slightly from the 2000–2005 period where in fact it rose. But that
rise, as we have seen, produced only a short-run burst in high growth followed by a
sharp fall.27 The additional capital investment was signiﬁcantly less productive than
in the recent past. Going forward, these projections suggest that TFP would have

27In national income accounting, a sharp rise in the rate of capital formation as a share of GDP will itself
increase the rate of growth even if that investment is not very productive. Encima 2 o 3 years or more as that investment is
completed, sin embargo, the rate of growth will depend on the increase in goods and services produced by that investment.

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 27

Mesa 4. Supply Side Sources of Growth in the PRC

Growth Rate (%)

Contribution to Growth (%)

Período

1953–1957
1958–1978
1978–2005
2006–2011
1953–2005

GDP Fixed Capital Educated Labor TFP Capital Educated Labor TFP
72.4
6.5
–13.4
3.9
40.1
9.5
19.4
11.0
30.9
7.0

14.9
39.7
16.2
8.6
21.4

12.7
73.7
43.7
72.0
47.7

1.9
6.7
9.6
14.4
7.7

4.7
–0.5
3.8
2.1
2.1

1.7
2.7
2.7
2.1
2.6

Nota: The estimates for 1953–2005 were taken from Perkins and Rawski (2008, 839) while those for 2006–2011
were computed using the same basic methodology. Those interested in pursuing this methodology further are referred
to the said essay and the authors’ websites that include the appendixes to that essay. The educated labor ﬁgures and
ﬁxed capital ﬁgures were computed by Dr. Zhang Qiong using the same methodology as the earlier data, and I am
grateful to her for sharing these estimates. The GDP and raw labor data were obtained from the National Bureau of
Estadísticas (2012, 24 y 43) and National Bureau of Statistics (2011, 60 y 112). As the share of labor income in gross
national income has fallen steadily and was a low 45% of income in 2010, the shares of labor and capital used to
compute the TFP residual were .45 y .55 respectivamente, while the labor and capital income shares in national income
for the earlier years were .53 y .47 respectivamente.
Fuentes: Perkins, Dwight, and Thomas Rawski. 2008. Forecasting China’s Economic Growth to 2025. In China’s Great
Economic Transformation, edited by Loren Brandt and Thomas Rawski, páginas. 829–86. Nueva York: Cambridge University
Prensa; National Bureau of Statistics (various years).

Mesa 5. Hypothetical Projections of the Future Sources of GDP Growth
(%)

PIB

Fixed Capital

Raw Labor

Education Enhanced

TFP Growth

1979–2005
2006–2015
2016–2025
2006–2015
2016–2025

9.5
9.0
9.0
6.0
6.0

9.6
9.8
8.2
8.1
5.6

1.9
0.7
−0.3
0.7
−0.3

2.7
2.0
1.0
2.0
1.0

3.8
3.6
4.9
1.4
3.0

Nota: This is a shortened version of a table in Perkins and Rawski (2008, 852–53).
Fuente: Perkins, Dwight, and Thomas Rawski. 2008. Forecasting China’s Economic Growth to 2025. In China’s Great
Economic Transformation, edited by Loren Brandt and Thomas Rawski, páginas. 829–86. Nueva York: Cambridge University
Prensa.

to grow at 3.6% a 4.9% a year over the next 1 a 2 decades in order to maintain a
GDP growth rate of 9%. The PRC in the past has managed a TFP growth of 3.6%
per year but never 4.9%, and in recent years, the ﬁgure has been well below even
3.6%. When the beginning of a decline in the total labor force is taken into account,
together with the fact that the investment rate is no longer rising, a 2.1% TFP growth
will produce only a growth rate of around 6% a year (during 2016–2025) using the
data in Table 5. This is not a forecast, but it does suggest that the PRC will have
to maintain a higher rate of growth in productivity than in the recent past if it is to
achieve a sustained GDP growth rate of above 6%. How realistic is that?

The Third Plenum of the 18th Chinese Communist Party Central Committee
outlined a list of 60 points covering areas of reform that were going to be im-
plemented. Many of these directly related to the challenge of maintaining a high
rate of TFP growth. El 60 points begin with general guidelines, one of which is
that the market should play the decisive role in resource allocation. The document

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28 ASIAN DEVELOPMENT REVIEW

also calls for securing property rights protection, actively developing diversiﬁed
ownership (with a particular emphasis on non-public ownership), and eliminating
“administrative monopolies” of state enterprises. It also supports a variety of other
measures to make the state enterprise sector more productive; to establish market
rules that are fair, abierto, and transparent; to improve ﬁnancial markets, including al-
lowing qualiﬁed private capital; and to create a market-based system for encouraging
technological innovation.

The document further states that the role of the government should be changed
de modo que, among other things, the government withdraws from business activities that
can be regulated and modulated by markets. The economy should be opened up even
more to the outside world and the problem of unequal treatment of rural-to-urban
migrants directly dealt with by calling for a full, if no doubt gradual, integration of
the rural and urban social-service systems. There are ﬁve points dealing with legal
reforma, including greater transparency in courts and prosecuting bodies as well as
fairness and independence of these institutions. En general, over half of the 60 puntos
deal with issues that are central to maintaining a high rate of productivity growth
either directly or indirectly. The issue going forward is not whether this is a good
lista, es. The central issue is the pace and thoroughness with which these reforms
are interpreted in practice and implemented.

If resistance to these reforms is overcome and they proceed rapidly, sin embargo,
they will still not fully solve the challenge of maintaining a fairly high rate of growth
(6% a 8%) Por otro 1 a 2 décadas. There is very little in the 60 points that deals
directly with concrete measures to alter the current imbalance between household
consumption and investment, although there are several reforms discussed that would
inﬂuence that imbalance indirectly, particularly the one dealing with the uniﬁcation
of rural and urban social services. The PRC will probably have to maintain a fairly
high rate of investment for the immediate future, but if the current rate—where
nearly half of GDP is invested each year—continues indeﬁnitely, this will undermine
the ability to raise productivity growth, as it is unlikely that the government and the
society at large can ﬁnd and implement enough high-return investment opportunities
to justify that level.28 It will also make corruption more difﬁcult to control, con
profound political as well as economic implications. The PRC’s current vigorous
anti-corruption campaign will have some impact reducing the level of corruption,
but if the opportunities for corrupt actions due to massive public construction and
over regulation continue as in the recent past, the anti-corruption effort is likely to
fail with highly uncertain but likely negative consequences for economic growth.

There is also the issue that short-term shocks to the economy could derail
growth for a time, and enough of them could slow the long-term growth rate further.

28It is not that there are limited numbers of investment opportunities in principle, but investors have to ﬁnd
those opportunities, ﬁnance them, and then get them efﬁciently implemented. There is a reason why the demand for
investment as a function of the rate of return on investment slopes downward and to the right.

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UNDERSTANDING THE SLOWING GROWTH RATE OF THE PEOPLE’S REPUBLIC OF CHINA 29

This essay on long-term trends is not the place to attempt to analyze the various
external and internal shocks that could derail the PRC’s rapid catch-up growth.
Sin embargo, it does need to be pointed out that the emphasis placed in this essay on
the need to rely more on sectors that generate high productivity, notably private
as contrasted to state-owned enterprise, together with a liberalized ﬁnancial sector,
will mean plenty for how the economy will work going forward. It will no longer
be possible for the state to simply order or pressure ﬁrms to invest more, nor will it
be possible for the government to basically print money to bail out insolvent banks,
as done in the past, or bankrupt local governments, as possibly will happen in the
near future. A large and failing shadow banking system in the future, Por ejemplo,
would have a direct negative impact on private investment in ways that might not be
the case with state investment. Continuing reliance on state-enterprise investment,
sin embargo, while it might make a recession more easily handled, would also be at the
price of a much lower long-term growth rate because of the weak returns to most
state-enterprise investment.

The PRC over the next 1 a 2 decades faces formidable challenges if it is to
keep the economy growing at a catch-up rate of 5% a 7% a year. A higher rate
than that over the next 2 decades is not likely to be achievable however vigorous the
reform efforts. The “easy” boosts in productivity from dismantling the old centrally
planned command system are in the past, although greatly reducing the role of
the state-owned enterprises in favor of private entrepreneurial leadership would
clearly help keep the rate of return on investment high. Future productivity growth,
sin embargo, also will depend on the technically much more difﬁcult task of improving
the performance of what is already mainly a market-driven system. The fact that the
PRC must achieve this while at the same time restructuring the economy to depend
less on excessive levels of investment and with slower growth in exports makes the
challenge that much greater.

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Eichengreen, Barry, Dwight Perkins, and Kwanho Shin. 2012. From Miracle to Maturity: El
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European Cement Association. 2014. Key Facts and Figures. Available online: www.cembureau

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