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Dissecting the China Puzzle : Asymmetric Liberalization and Cost Distortion

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  • Huang Yiping

    (China Center for Economic Research)

Abstract

In this paper we attempt to explain the China Puzzle : coexistence of accelerating economic growth and worsening growth outlook. The root cause lies in Chinas unique liberalization approach, i.e., the combination of complete liberalization of product markets and continued distortions in factor markets. Repressed costs of labor, capital, land and resources artificially raise profits of production, increase returns to investment and improve international competitiveness of Chinese products. This is why economic growth is strong, but investment and exports are even stronger. These distortions also contribute to the global imbalances by boosting Chinas current account surpluses and capital outflows in forms of foreign exchange reserves. We estimate factor cost distortions for 20002009 to gauge the likely magnitudes and crossyear patterns. They provide a reasonable explanation of the movement in economic imbalances. These findings have important policy implications. The governments efforts to rebalance the economy after 2003 failed because it did not attack the root cause, i.e, the incentive structure. Popular calls for renminbi appreciation might work ineffectively as currency undervaluation is only part of the distortion. The best policy for achieving sustainable growth would be a comprehensive package focusing on liberalization of the factor markets and elimination of cost distortions.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22874.

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Date of creation: Jan 2010
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Handle: RePEc:eab:macroe:22874

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Related research

Keywords: China puzzle; asymmetric market liberalization; cost distortion; Imbalances;

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  1. Jeffrey D. Sachs & Wing Thye Woo, 1997. "Understanding China's Economic Performance," NBER Working Papers 5935, National Bureau of Economic Research, Inc.
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Cited by:
  1. Bing Xu & Adrian van Rixtel & Michiel van Leuvensteijn, 2014. "Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets," Banco de Espa�a Working Papers 1404, Banco de Espa�a.
  2. Johansson, Anders C. & Wang, Xun, 2011. "Financial Repression And Structural Imbalances," Working Paper Series 2011-19, China Economic Research Center, Stockholm School of Economics.
  3. Guillaume Gaulier & Françoise Lemoine & Deniz Ünal, 2011. "China's Foreign Trade in the Perspective of a More Balanced Economic Growth," Working Papers 2011-03, CEPII research center.
  4. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.
  5. Julan Du & Hongsheng Fang & Xiangrong Jin, 2013. "Chinese Political and Economic Governance System and the Imbalance between Consumption and Investment," Working Papers 232013, Hong Kong Institute for Monetary Research.

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