The Global Financial Crisis and the Export-Led Economic Growth in China

Abstract

The growing trade conflict with the United States has heightened concerns on the progress of China’s economic rebalancing and restructuring from export-led growth strategy to one propelled by domestic consumption. This article examines the role of exports in China’s economic growth in both the short run and the long run. Using an ARDL model and quarterly time series data from 1994 and 2018, we find evidence indicating heightened importance of exports in China’s GDP growth after the Global Financial Crisis, and our results suggest that the transition from an export-led growth strategy is proceeding far less smoothly than hoped.

Keywords:

• exports
• China
• economic growth
• global financial crisis
• ARDL

Notes

Notes

1 China recorded a pronounced deceleration in economic growth in 2013–2015. China’s growth rate has slowed from the double-digit rates recorded over the last three decades. Its growth rate fell from 10.6% in 2010 to 7.7% in 2013, 7.3% in 2014, 6.9% in 2015, to 6.7% in 2016 and 2017.

2 The situation has become even more urgent at present as fears of a trade war between China and the United States are escalating. An important issue for the People’s Bank of China and the Chinese government is to weigh the importance of currency as a tool in trade negotiations with the United States vis-à-vis using another devaluation to offset the impact of any trade deal that curbs exports.

3 Sharp increases in investment, especially large-scale projects, have long been the driving force of China’ rapid economic growth over the past 30 years. While it is an obvious choice as China transitioned from an agricultural to an industrialized country, such an economic growth model is not sustainable in the long term given its huge implication for government debt, energy consumption, and carbon emissions, among others.

4 For instance, China’s 13th Five-Year Plan, unveiled in November 2015, emphasizes continued economic reforms and especially the urgent need to enhance innovation and domestic consumption in order to make the economy less dependent on fixed investments and exports.

5 The findings are not surprising as China officially adopted its open-door policy only in 1978 and exports played a small role in the economy during the 1970s and the1980s. Exports started to take off after 2001 when China was allowed to join the WTO.

6 In 2015, China’s total debt, according to UBS Group AG estimates, equaled almost 260% of annual economic output, up from less than 160% in 2007. During the first 11 months of 2015, China’s state-owned enterprises saw profits fall 9.5% while their debt increased 18.2%, according to BMI Research Corp.

7 https://www.statista.com/statistics/263661/export-of-goods-from-china/, accessed September 24, 2018.

8 http://www.eastasiaforum.org/2013/03/09/chinas-prospects-for-export-driven-growth/, accessed March 13, 2016.

9 Interest rates in China are still controlled by the Chinese government, though they are being slowly liberalized. Over the past few decades, China has strictly implemented the one-child policy, leading to huge demographic changes in the country. To address the issue of a rapidly aging population and the rising cost of labor, the Chinese government recently relaxed the one-child policy and couples can now have a second child.

10 For example, in March 2012 in response to a complaint from SolarWorld Industries America, a U.S. manufacturer that is a subsidiary of Germany's SolarWorld, the U.S. Commerce Department began imposing tariffs on Chinese solar panel imports which were hit with tariffs ranging from 2.9% to 4.7%. In December 2014, on the grounds that the companies were selling products below the cost of manufacture and that the Chinese companies were benefiting from unfair subsidies from their government, the department announced anti-dumping duties of 26.71% to 78.42% on imports of most solar panels made in China. In addition, the department announced anti-subsidy duties of 27.64% to 49.79% for Chinese modules. Subsequent to the “anti-dumping and anti-subsidy” measures taken by the United States, European Union, Canada, Australia, and India announced an investigation of China’s solar power products. Domestic producers were hard hit by these measures as they rely overwhelmingly on overseas markets since domestic demand for solar energy and the related products is far smaller than supply.

11 Global aggregate demand has been significantly affected since the onset of GFC. Ten years after the financial crisis erupted, the global economy remains fragile and at risk of another recession, according to IMF research. As such, by the end of our sample period of March 2018, it is suggested that the global demand has not returned to what it was before the start of GFC and therefore the GFC dummy is set to zero for the period prior to September 2008 and set to 1 thereafter, in order to capture the prior- and post- crisis effects.

12 As a robustness test, we created and tested another dummy variable. It is equal to 1 for the period March 2005 to December 2009 and 0 otherwise. The results show that neither dummy variable nor the dummy*exports interactive variable is statistically significant at the 10% level. Other time periods for the dummy variable were also used and the results are robust.

13 As of 2014, the share of services in GDP was 48.1%, compared to the world average of 68.5%, United States (78%), Japan (72%), and India (52.6%), according to the World Bank statistics.