Rebalancing China's Economy: What Does Growth Theory Tell Us?

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Rebalancing China's Economy: What Does Growth Theory Tell Us?

Author Info

Jahangir Aziz

Abstract

This paper uses the standard one-sector neoclassical growth model to investigate why China's consumption has been low and investment high. It finds that the low cost of capital has been quantitatively an important factor. Theory predicts that the price of capital may have been significantly distorted in the 1990s and 2000s. The distortion could have been caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending. If China is to rebalance growth towards relying more on consumption and less on exports and investment, banking sector reforms and financial market development could, therefore, turn out to be key.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/291.

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Length: 34 pages
Date of creation: 08 Jan 2007
Date of revision:
Handle: RePEc:imf:imfwpa:06/291

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-05-04 (All new papers)
NEP-CNA-2007-05-04 (China)
NEP-DEV-2007-05-04 (Development)
NEP-DGE-2007-05-04 (Dynamic General Equilibrium)
NEP-MAC-2007-05-04 (Macroeconomics)
NEP-SEA-2007-05-04 (South East Asia)
NEP-TRA-2007-05-04 (Transition Economics)

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Alan Heston, . "What Can Be Learned About the Economies of China and India from Purchasing Power Comparisons?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 229, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]

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