RDP 2010-08: Sources of Chinese Demand for Resource Commodities 2. Sources of Chinese Growth

2.1 The Debate about the Sources of Growth

The question of what drives China's demand for resources is related to the more general debate about the sources of China's growth. The idea that global demand for low-cost Chinese manufacturing exports has been a major contributor to China's strong growth performance in the post-1978 reform era is taken for granted in many papers (for example, Eichengreen et al 2007; Haltmaier et al 2009; Blonigen and Ma 2010). Reports suggesting that China's growth has been ‘export-led’ have also regularly appeared in the media (for example, Stutchbury 2009).

But the view that China's growth has been driven by exports has recently been widely criticised. Keidel (2008) uses case studies of China's macroeconomic booms and slowdowns since 1978 to argue that domestic shifts in investment and consumption have been primarily responsible for China's growth. In a similar vein, Anderson (2007), He and Zhang (2010) and Sun (2009) all argue that exports divided by GDP (currently at about 30 per cent) overstates the export share of the economy. Anderson views this measure as especially flawed in China's case, as Chinese exports have a low value-added content due to the prevalence of high value-added imported intermediate inputs. He and Zhang use input-output tables (for 2002) developed by Koopman, Wang and Wei (2008) to show that, once processing trade is accounted for, China's ratio of export value-added to GDP is only about 15 per cent.

He and Zhang (2010) also employ a provincial-level panel dataset to test for leading relationships between export growth and growth in domestic expenditure. They find that export growth Granger causes investment growth and GDP growth in the coastal provinces (which have been the focus of the Chinese government's efforts to increase China's export orientation for many years), but that it does not Granger cause investment growth in China overall. Based on more disaggregated tests, they argue that the main channel through which export growth Granger causes GDP growth is its positive impact on productivity growth.

Recent research thus argues that exports have been a less significant contributor to GDP growth than investment and consumption in the reform era. But this does not mean that exports – and the manufacturing sector more generally – are unimportant for growth or the demand for resources. Attempts to calculate the contribution of exports to growth tell us little about how important the export sector really is in the Chinese economy because they do not account for the indirect effects of the manufacturing export sector on investment. The growth of the export sector, together with domestically oriented manufacturing operations, has undoubtedly fuelled substantial investment spending. This investment includes capital spending related directly to manufacturing, but also investment in infrastructure, services and housing (for urban workers) that are necessary to support a growing export sector.

2.2 Some Facts about Chinese Investment and Exports

One commonly used way to determine the sources of Chinese growth is to calculate the contributions of investment, consumption and net exports to GDP growth. However, comparing the contribution of net exports to growth with the contributions of other components tells us little about the fundamental drivers of growth in any given economy.^[4] A country could have net exports of zero and yet exports could produce much of the income that supports consumption (including of imported consumer items) and drive growth in investment (which might also absorb a sizeable share of imports). And even if exports are small relative to total GDP, this may hide many indirect effects that an expanding export sector has on growth (and the demand for resources). These effects cannot be easily seen from the national accounts, but can be detected, at least partially, with input-output tables (as in Section 3) or with the aid of an econometric model (as in Section 4).

Nonetheless, such statistics provide useful background information, and build intuition for what the sources of resource demand in China might be. On an expenditure basis, the key contributor to Chinese growth in recent years has been investment. Since 2000, real GDP growth has averaged around 10 per cent per year. Gross fixed capital formation has accounted for more than half of this growth, with an average real growth rate of 12 per cent per year, and a share in GDP of over 40 per cent in 2009. Consumption has accounted for around two-fifths of GDP growth, with annual growth of roughly 8 per cent. Net exports have accounted for only one-twentieth of annual growth in GDP over this period. But as we have observed, calculating the contribution of net exports ignores the fact that exports may be an important driver of growth in national income. In fact, exports have contributed more than a third of annual real GDP growth since 2000. Owing to the apparent importance of investment and exports for growth, we proceed by examining the sectoral drivers of investment, before considering some facts about the Chinese export sector.

Much of the increase in Chinese investment in the past decade, and particularly in the past year or so, has been driven by strong growth in residential and non-residential construction. It is commonplace to think of this construction as being driven primarily by ‘infrastructure’ investment. To the extent that this is true, however, it says little about what might be driving that building in the first place. In particular, substantial investment in infrastructure is necessary to support commercial activities such as manufacturing and retail trade, and demand that arises from those sectors.

Manufacturing and infrastructure are now of roughly equal size as a share of total investment, at around 30 per cent (Figure 1).^[5] The next largest category is real estate investment, with the primary, mining and service sectors accounting for the remainder. After rising in the mid 1990s, the share of infrastructure investment has declined while manufacturing has rapidly gained share in the current decade, overtaking infrastructure around 2007. This situation reversed in early 2009 (at least temporarily) as growth in infrastructure investment picked up sharply due to the fiscal stimulus measures introduced by the government.

The increased importance of manufacturing and real estate in total investment is related to another trend: the growing role of the private sector in investment (Figure 2). Although recent fiscal stimulus measures have at least temporarily boosted the role of the state in driving investment spending, for many years investment by government-owned or -controlled (‘public’) enterprises has been steadily declining as a share of urban investment. Over the past five years, the share of public investment has fallen from almost 60 per cent to around 45 per cent. The falling share of public investment and the rising share of private investment reflect both the legal transformation of state-owned firms into joint-stock corporations and a change in the industrial composition of investment: infrastructure investment continues to be mainly conducted by firms under government ownership or control, while the rapid growth in manufacturing and real estate investment has been driven mainly by the private sector.

Growth in (predominantly private) manufacturing investment has partly reflected the rise of the Chinese manufacturing export sector. China's manufactured exports have risen significantly since the early 1990s, in line with the increasing integration of China into the global economy, and bolstered by China's accession to the World Trade Organization in 2001.

The vast bulk of Chinese goods exports (around 95 per cent) are manufactured items. Since the beginning of the economic reform period in 1978, Chinese merchandise exports have risen steadily from less than 1 per cent of global exports to around 10 per cent currently. From an initial specialisation in relatively low-tech items such as textiles, clothing and agricultural products, Chinese exports have become increasingly sophisticated, with growing market shares in machinery and equipment, electronics, white goods, motor vehicles and other consumer durables.

Moreover, China has rapidly risen in significance as a centre of assembly and processing operations, whereby intermediate inputs are imported from overseas, processed or assembled into final goods and then exported to third markets. Since the early 1990s, processing and assembly exports (the sum of ‘processing and assembly’ and ‘processing with imported materials’ exports) have averaged more than half of total exports (Table 1).^[6]

The integration of China into global manufacturing networks means that fluctuations in foreign orders can rapidly lead to changes in domestic production. So, to the extent that growth in resource-intensive investment reflects developments in the manufacturing export sector, over the past couple of decades this investment has probably become more sensitive to developments overseas.

Footnotes

As noted by He and Zhang (2010), the calculation of a GDP component's contribution to growth is ‘purely an accounting relationship, suggesting no theoretical relationships or theoretical underpinning’. [4]

Since disaggregated data on gross fixed capital formation are not publicly available, we must use fixed asset investment (FAI) data. See Appendix A for details on how the sectoral FAI series are constructed from available sources. [5]

Haltmaier et al (2009) show that advanced Asian economies have been supplying China with intermediate goods that are subsequently exported as final goods. According to Dean, Fung and Wang (2008), in 2002, east and south east Asian suppliers accounted for 80 per cent of China's processing intermediate imports. Zhang (2008) uses Chinese firm-level data to show that in 2006, up to one-half of high-income Asian economies' exports to China were processed and exported to developed economies. [6]