China Can Maintain Its Economic Growth

So far China’s situation in this respect is also satisfactory. Taking the average for the latest three years for which there are data, to avoid distortions by short-term fluctuations, China invested 5.1 percent of GDP for each one percent economic growth, whereas the U.S. had to invest 7.9 percent. China’s investment was therefore about 50 percent more efficient than that of the U.S. But China’s investment efficiency has fallen – the gap used to be bigger.

A key reason is the slowdown in China’s industrial growth. Productivity increases in services are much slower in all countries than in industry. But in the last three years China’s industrial growth has significantly decelerated to around nine percent a year, as shown in the chart.

It is too early in China’s development to shift from a manufacturing to a service based economy. To take a comparison, South Korea is still an economy dominated by manufacturing but China’s per capita GDP is only one quarter to one third of South Korea’s, depending on the measure used. A premature shift from industry to services would therefore lead to a significant decline in China’s economic efficiency.

So far the problem is not serious – nine percent industrial growth is sufficient to achieve China’s 7.5 percent GDP growth target. But any further industrial deceleration would be damaging as services are no substitute for manufacturing industry in productivity growth.

Maintaining the competitiveness of China’s industry will therefore be the key to maintaining its overall economic efficiency and growth in the coming years.


JOHN ROSS is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.

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