NCPA - National Center for Policy Analysis


November 14, 2006

With an average annual increase in gross domestic product (GDP) over the last two decades of more than 9 percent, China's economic development has been nothing short of spectacular.  But such astonishing growth inevitably inspires the perennial question: How long can China keep it up?

Co-authors John Whalley and Xian Xin attempt to answer the question with data supplied by the National Bureau of Statistics of China.  They consider, in particular, the roles of what they call two distinct sub-economies.  One involves the mainly manufacturing-based Foreign Invested Enterprises (FIEs), which are often joint ventures between Chinese enterprises (usually state-owned) and overseas companies supplying Foreign Direct Investment (FDI), product designs, and international sales networks.  The second sub-economy is the non-FIE portion of China's economy in manufacturing, agriculture and services.

The two sub-economies are of course related, but quite different:

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

In dollar terms annual FDI inflows to China were less than $2 billion in 1985, but had ballooned to $61 billion by 2004.

Source: Matt Nesvisky, "Will Super-High Chinese Growth Continue?" NBER Digest, November 14, 2006; based upon: John Whalley and Xian Xin, "China's FDI and Non-FDI Economies and the Sustainability of Future High Chinese Growth," National Bureau of Economics, Working Paper No. 12249, May 2006.

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