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

36 Pages Posted: 12 Jan 2007  

Jahangir Aziz

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: Janurary 2007

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.

Keywords: Economic growth, China, Economic policy, Bank reforms, Financial sector, Capital markets, Capital, Consumption, Investment, Exports, Economic models

JEL Classification: E21, E22, O4, O53

Suggested Citation

Aziz, Jahangir, Rebalancing China's Economy: What Does Growth Theory Tell Us? (Janurary 2007). IMF Working Paper No. 06/291. Available at SSRN: https://ssrn.com/abstract=956755

Jahangir Aziz (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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