Risk Management

American Economic Review 101 (February 2011): 202–241 http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.1.202

Growing Like China
By Zheng Song, Kjetil Storesletten, and Fabrizio Zilibotti* We construct a growth model consistent with China’s economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China’s economic transition. (JEL E21, E22, E23, L60, O16, P23, P24)

Over the last 30 years, China has undergone a spectacular economic transformation involving not only fast economic growth and sustained capital accumulation, but also major shifts in the sectoral composition of output, increased urbanization and a growing importance of markets and entrepreneurial skills. Reallocation of labor and capital across manufacturing firms has been a key source of productivity growth. The rate of return on investment has remained well above 20 percent, higher than in most industrialized and developing economies. If investment rates have been high, saving rates have been even higher: in the last 15 years, China has experienced a growing net foreign surplus: its foreign reserves swelled from 21 billion USD in 1992 (5 percent of its annual GDP) to 2,130 billion USD in June 2009 (46 percent of its GDP); see Figure 1. The combination of high growth and high return to capital, on the one hand, and a growing foreign surplus, on the other hand, is puzzling. A... [continues]

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