The document discusses China's economic development and challenges with overreliance on investment and credit-driven growth. It notes that while investment drove significant GDP growth from 2000-2008, the impact of new loans on GDP growth declined from 2009-2011, suggesting diminishing returns. It argues that continuing to prop up growth through easy monetary policies will likely fail and could lead to asset bubbles or inflation. Instead, it advocates for China to shift toward an innovation-driven model of development to achieve more sustainable growth.

1. Arsalan Ahmed
PhD Student, School of Economics
Shandong University

2.  In 1990 Porter put out four stages of national economy
development including the factor-driven, investment-
driven, innovation-driven and wealth-driven
 The development of world economy proves that
innovation is the key factor to promote the economic
development and innovation-driven development is
regarded as an advanced development pattern.

3.  Investment-Driven Development by definition is a
strategy where the government and/or the public
corporate sector push the economy forward by
investment.
 However, if the rate of investment is too fast, or
the scope of potential market expansion is
limited, then government induced investment
could become underutilized, and subsequently
wasted due to depreciation.

4.  During 2000-08, average GDP growth for China was
10.4%. In terms of GDP by value, the GDP increased by
21.5 trillion Yuan (from 9.9 to 31.4 trillion Yuan).
 For the same period, 20.3 trillion Yuan of new loans
were issued. The impact of debt on GDP growth was
significant, with one Yuan of debt leading to an
incremental impact of 1.05 Yuan on the GDP.

5.  During 2009-11, average GDP growth was slightly lower
at 9.6%. In terms of GDP by value, the GDP increased
by 15.8 trillion Yuan (from 31.4 to 47.2 trillion Yuan).
 For this period, 25.7 trillion of new loans were issued.
The impact of one Yuan of debt on incremental GDP
growth was just 0.61 Yuan.

6.  New loans are having a diminishing impact on GDP
growth.
 China is trying to ease monetary policies to boost
growth. Given the kind of impact new loans are having
on GDP growth, the policy action is bound to fail.
 Instead of being productive, easy monetary policies
and excess liquidity can manifest itself in the form of
asset bubbles or consumer inflation.
 Example: The real estate bubble in several cities in
China

7.  China's M2 as a percentage of GDP for 2011 was 181%.
Very clearly, the strategy of propping GDP growth
through easy money is not sustainable with a
skyrocketing M2. GDP growth is likely to collapse
when inflation forces policymakers to tighten
liquidity.
 Also Rapid credit growth (significantly above GDP
growth) always leads to a relatively high percentage of
non-performing loans.

8.  A Study performed by two economists affiliated with
the Chinese National Development and Reform
Commission (NDRC) shows the following results.
a) The delivery rate of completed capital projects, which
was 74-79% in the late 1990s, has now fallen below 60%.
This implies that nearly 40% of Chinese investment
projects are either not finished on time or not completed
at all.

9. b) The ineffective investment has cost China $10.8
trillion since 1997. Sixty-two percent of the wasteful
investment—$6.8 trillion—was made after 2009, when
China went on an investment binge to stimulate its
economy.
c) China’s ICOR has risen 50%, from 2.6 (for the period
of 1979-1996) to 4 (for the period of 1997-2013), this
means that before 1997 China needed $2.60 in
investment to generate one dollar of GDP growth; today,
China needs $4 to produce a dollar of GDP growth.

10.  China’s investment rate, averaging 43% of GDP.
 Chinese government and state-owned enterprises
invest $2.3 trillion a year in infrastructure and factories
(43% of the country’s total investment).
 According to the Ministry of Industry and Information
Technology, the output of China’s iron and steel
industry reached 660 million tons in 2009, 40 percent
more than the annual demand (470 million tons)
while major iron and steel investment projects were
announced in Guangdong and Guangxi.

11.  In the solar power industry, China’s current output is
about twice the global demand. But among newly
released investment projects, solar energy is still on
the list.
 Other industries with excessive output include the
cement, coal, chemical, polysilicon, wind power
equipment, and automobile industries.

12. Basic Statistics on People's Living Conditions
Employment 1990 2000 2010 2011 2012
Average Number of Employed Persons
per Urban Household (person)
1.98 1.68 1.49 1.48 1.49
Registered Urban Unemployment
Persons (10 000 persons)
383 595 908 922 917
Registered Urban Unemployment Rate
(%)
2.5 3.1 4.1 4.1 4.1

13.  In the 1920s, the American government also adopted a
policy of increasing investment. Within ten years, the
automobile industry has expanded by 255 percent,
with an increase of 75 percent in the iron and steel
industry. With inadequate demand, industrial
expansion became a major reason for the Great
Depression in the 1930s.

14.  Domestic consumption in China has remained at a
comparatively low level, at 35 percent of GDP. Even
combined with government expenditure, the total
percentage is only slightly more than 50 percent.
Therefore, increased investment in industrial
development will most likely lead to excessive output.
As a matter of fact, excess output has already become a
problem in some major industries

15.  What is Innovation -Driven Development ?
 Politicians often emphasize the spirit behind
innovation rather than specific details.
 Scientists often refer to innovation as the creation of
something new, regardless of whether or not there is
economic value.
 Economists tend to focus on the commercial effect of
innovation over other associated factors.
 .

16.  Innovation can be described as a complex process of
value creation, including scientific and technological
value, economic and social value, and cultural value
concerning activities of scientific discovery,
technological invention, methodological innovation,
and their commercial application as well as social
diffusion.

17.  Innovation policy represents the combination, in a
coordinated manner, of science and technology policy and
industry policy (Rothwell, 1986).
 Innovation policy traditionally seeks to facilitate
innovation with the purpose of stimulating economic
growth and aiming at creating an institutional
environment to deal with the challenges of more
fundamental types of transformative change (Alkemade et
al., 2011; Weber, 2012).
 Innovation policy address major social challenges
(European Commission, 2010) and seek to phase out
unsustainable industries within a sustainable scenario
(Weber, 2012).

18.  In 2006, Chinese government issued the “Outline of
Medium and Long Term Plan for National Science and
Technology Development (2006-2020)” (MLP) to
strengthen the indigenous innovation capabilities with
a goal to become innovation-driven country by 2020
and a world leader in science and technology in 2050.
 MLP is a milestone in the transformation period which
means that China has to transform its development
pattern from the one relying on the investment of
natural resources and cheaper labor to the innovation-
driven one.

19.  However, there are certain management problems
affect the implementation of S&T investment policy in
MLP.
 Firstly, there is an inconsistency between support
policy and detailed policy documents leads to the
inefficient implementation.
 Secondly, the government departments which
proposed detailed policies have some overlapping
responsibilities in allocating the S&T resources. In the
20 detailed policy documents, there are eight
documents proposed by the same department
documents.

20.  National innovation capacity-building Should not only
focuses on science, technology and industry, but also
on social innovation development. This refers to
enterprises as well as the public service sector.
 An example of innovation development in the public
service sector could be creating new resources to
support a higher quality of education system or
improvements in the health care system. All of such
plans and policies are sure to bring about some rather
fundamental changes in the future.

22.  European Commission, 2010. Innovation Union Communication.
 Feng-chao Liu, Denis Fred Simon, Yu-tao Sun, Cong Cao. 2011. China’s
innovation policies: Evolution, institutional structure, and trajectory.
Research policy40, PP917-931
 Floortje Alkemade, Marko P. Hekkert, Simona O. Negro, 2011.
Transition policy and innovation policy: friends or foes? Environmental
Innovation and Societal Transitions 1, PP125–129.
 Geels, F. W., Schot, J., 2007. Typology of sociotechinical transition
pathways. Research policy36, PP399-417
 Helena Acheson, Kincso Izsak, Paresa Markianidou. 2011. Innovation
Policy Trends in the EU and Beyond. An Analytical Report 2011 under a
Specific Contract for the Integration of the INNO Policy TrendChart
with ERAWATCH (2011-2012) http://www.proinno-
europe.eu/sites/default/files/page/12/03/FINAL_X07_Inno%20Trends_
20 11_0.pdf

23.  K.Matthias Weber, Harald Rohracher. 2012. Legitimizingresearch,
technology and innovation policies for transformative change:
combining insights from innovation systems and multi-level
perspective in a comprehensive ’failures’ framework. Research Policy
41. PP1037-1047.
 Michael E. Porter. The Competitive Advantage of Nations [M].New
York: The Free Press. 1990. Chapter 10
 Rothwell, R. 1986.Public Innovation Policy: To Have or to Have Not?
R&D Management 16: 25–36.
 Rongping Mu & Yonggang Fan 2011. Framework for building national
innovation capacity in China, Journal of Chinese Economic and
Business Studies, 9:4, 317-327
 Stiglitz, J., Sen, A., Fitoussi, J. P., 2009. The measurement of economic
performance and social progress revisited. http://www.stiglitz-sen-
fitoussi.fr/documents/overview-eng.pdf [11] World Economic Forum,
2011. Redefining the Future of Growth: The New Sustainability
Champion

24. Thank You
Comments /Questions?