China is a vast country that has changed rapidly over the past four decades. The Chinese Economic Growth Initiative will conduct ground-breaking research to provide a better understanding of the factors driving China’s extraordinary economic expansion. A second objective of this Initiative will be access for Chinese and US researchers to reliable data about the impacts of its institutional structures on economic growth.
To facilitate this work, BFI, the Chinese University of Hong Kong, and Tsinghua University have formed a collaborative research project to explore the role of various institutions in China’s economic growth model. This collaboration will leverage a unique combination of Chinese administrative and commercial data to produce rigorous, world-class research.
Key questions this Initiative will explore include:
- What are the costs and benefits of the current system?
- How could the institutional foundation of the China Model impact long-run business growth?
- How can current institutions at the state and local levels work better in terms of economic efficiency?
- How has the transformation toward large firms in China increased efficiencies?
“This partnership will include collaborations with both the Chinese government and the private sector to develop a systematic approach for analyzing real-time data from multiple sources. The goal is to improve the measurement of China’s current economic status, which will hopefully make the Chinese economy more transparent.”
Chang-Tai Hsieh, Initiative Director
Zheng Michael Song
Chong-En Bai is Mansfield Freeman Chair Professor, Dean of the School of Economics and Management of Tsinghua University. He is also the Director of the National Institute for Fiscal Studies of Tsinghua University. He earned his Ph.D. degrees in Mathematics and Economics from UCSD and Harvard University, respectively. His research areas include Institutional Economics, Economic Growth and Development, Public Economics, Finance, Corporate Governance and Chinese Economy.
Research on the impact of institutional environment on the development of the service sector won the Inaugural Pu Shan-Bank of China best paper award given by China Society of World Economics in 2008. Research on the return to investment won the Sun Yefang Best Economics Paper Award in 2009. Study on the model of national income distribution and its reform was funded by the National Planning Office of Philosophy and Social Sciences Major Grant. Research on the national income distribution won the Zhang Pei-Gang Award for Outstanding Achievements in Development Economics in 2012. Study on the challenges to and the measures for the development of the service sector in China won the second Prize for Excellent Research in Humanities and Social Sciences in the Category of Research Report in Economics, awarded by the Ministry of Education of China. Study on the relation between health insurance and consumption won the second Prize for Excellent Research in Humanities and Social Sciences in the Category of Research Paper, awarded by the Ministry of Education of China. Research on explaining China’s economic slowdown in the wake of the global financial crisis from the perspective of productivity won the Sun Yefang Best Economics Paper Award in 2016.
Professor Bai is a member of the executive committee of International Economic Association, and of the Scientific Council of the Barcelona Graduate School of Economics. He currently serves on the editorial board of a few top economic journals in China. He also served on the editorial board of Journal of Comparative Economics from 2004 to 2006 and of The World Bank Economic Review from 2006 to 2008 as well as from 2011 to 2013.
Professor Bai is a member of the National Committee of the Chinese People’s Political Consultative Conference, the “14th Five-Year Plan” National Development Planning Expert Committee, the Chinese Economists 50 Forum, the China Finance 40 Forum, and Chinainfo 100. He was a member of the monetary policy committee of the People’s Bank of China from 2015 to 2018. He served as Adjunct Vice-President of Beijing State-Owned Assets Management Co., Ltd. from August 2011 to December 2012. He was a non-resident Senior Fellow of the Brookings Institution from 2006 to 2007.
Chang-Tai Hsieh conducts research on growth and development. Hsieh has published several papers in top economic journals, including “The Life-Cycle of Plants in India and Mexico,” in the Quarterly Journal of Economics; “Misallocation and Manufacturing TFP in China and India,” in the Quarterly Journal of Economics; “Relative Prices and Relative Prosperity,” in the American Economic Review; “Can Free Entry be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry,” in the Journal of Political Economy; and “What Explains the Industrial Revolution in East Asia? Evidence from the Factor Markets,” in the American Economic Review.
Professor Hsieh has been a visiting scholar at the Federal Reserve Banks of San Francisco, New York, and Minneapolis, as well as the World Bank’s Development Economics Group and the Economic Planning Agency in Japan. He is a Research Associate for the National Bureau of Economic Research, a Senior Fellow at the Bureau for Research in Economic Analysis of Development, and a member of the Steering Group of the International Growth Center in London.
He is the recipient of an Alfred P. Sloan Foundation Research Fellowship, an Elected Member of Academia Sinica, and the recipient of the Sun Ye-Fang award for research on the Chinese economy.
Zheng Michael Song is a Professor at the Department of Economics of the Chinese University of Hong Kong (CUHK) and a Distinguished Visiting Professor at Tsinghua University. Before joining CUHK, he was an Associate Professor of Economics at Chicago Booth. Professor Song is a co-editor of China Economic Review and an associate editor of Journal of European Economic Association. He is an academic committee member of China’s National Economics Foundation and an executive board member of the Association for Comparative Economic Studies. His research focuses on Chinese economy and macroeconomics. His papers appear on leading academic journals including American Economic Review and Econometrica. In 2013, he won Sunyefang Economic Science Award.
Special Deals with Chinese Characteristics
A Forensic Examination of China’s National Accounts
The Long Shadow of a Fiscal Expansion
Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China
Chinese local governments wield their enormous political power and administrative capacity to provide “special deals” for favored private firms. We argue that China’s extraordinary economic growth comes from these special deals. Local political leaders do so because they derive personal benefits, either political or monetary, from providing special deals. Competition between local governments limits the predatory effects of special deals.
China’s national accounts are based on data collected by local governments. However, since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics. China’s National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level. The adjustments made by the NBS average 5% of GDP since the mid-2000s. On the production side, the discrepancy between local and aggregate GDP is entirely driven by the gap between local and national estimates of industrial output. On the expenditure side, the gap is in investment. Local statistics increasingly misrepresent the true numbers after 2008, but there was no corresponding change in the adjustment made by the NBS. Using publicly available data, we provide revised estimates of local and national GDP by re-estimating output of industrial, construction, wholesale and retail firms using data on value-added taxes. We also use several local economic indicators that are less likely to be manipulated by local governments to estimate local and aggregate GDP. The estimates also suggest that the adjustments by the NBS were insufficient after 2008. Relative to the official numbers, we estimate that GDP growth from 2010-2016 is 1.8 percentage points lower and the investment and savings rate in 2016 is 7 percentage points lower.
In 2009 and 2010, China undertook a 4 trillion Yuan fiscal stimulus, roughly equivalent to 12 percent of annual GDP. The “fiscal” stimulus was largely financed by off-balance sheet companies (local financing vehicles) that borrowed and spent on behalf of local governments. The off-balance sheet financial institutions continued to grow after the stimulus program ended at the end of 2010. After the end of the stimulus program, spending by these off-balance sheet companies accounted for roughly 10% of GDP each year, with an increasing share used for what are essentially private commercial projects. The off-balance spending by local governments is likely responsible for a 5 percentage-point increase in the aggregate investment rate and part of the 7 to 8 percentage-point decline in current account surplus since 2008. Finally, we argue that local governments used their new access to financial resources to facilitate access to capital to favored private firms, which potentially worsens the overall efficiency of capital allocation. The long run effect of off-balance sheet spending by local governments may be a permanent decline in the growth rate of aggregate productivity and GDP.
Starting in the late 1990s, China undertook a dramatic transformation of the large number of firms under state control. Small state-owned firms were privatized or closed. Large state-owned firms were corporatized and merged into large industrial groups under the control of the Chinese state. The state also created many new and large firms. We use detailed firm-level data to show that from 1998 to 2007, (i) state-owned firms that were closed were smaller and had low labor and capital productivity; (ii) the labor productivity of state-owned firms converged to that of private firms; (iii) the capital productivity of state-owned firms remained significantly lower than that of private firms; and (iv) total factor productivity (TFP) growth of state-owned firms was faster than that of private firms. We find the reforms of the state sector were responsible for 20 percent of aggregate TFP growth from 1998 to 2007.
China’s investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from China’s national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.
China’s Economy Might Be Nearly a Seventh Smaller Than Reported
A new paper, by Chang-Tai Hsieh of the University of Chicago and three co-authors from the Chinese University of Hong Kong, finds that industrial output and investment have been consistently embellished. As a result, they argue that China overstated real GDP growth by two percentage points on average every year from 2008 to 2016 (see chart). Over time that adds up: official figures for 2016 would have exaggerated the size of the economy by 16%, or more than $1.5trn.
Last week, four China specialists published a paper arguing that China’s growth since 2008 has been about 1.7 percentage points lower annually than reported. In other words, the economic slowdown has been a lot steeper than Beijing reported. The economists—Chang-Tai Hsieh of the University of Chicago and Zheng Song, Wei Chen and Xilu Chen of Chinese University of Hong Kong—did two main tests of the official data.
The interplay between finance and macroeconomics in China provides a fascinating opportunity for new research. While financial markets are still fast growing and expanding their territory in China, the Chinese economy has been very innovative in advancing financial technologies. The special role of the Chinese government at both the local and national levels in financial activities has broad-reaching implications for macroeconomic performance and growth prospects in the future. This conference brought together elite scholars to explore the extent of our current understanding and the challenges for future research related to Chinese financial markets and their applications more broadly.