- China has transitioned through different stages of economic development, moving from a factor-driven to investment-driven economy and now focusing on innovation-driven growth. - Current main sources of economic growth in China include investment, consumption, and trade surplus, but these sources face challenges in being sustainable long term. - To develop new sources of growth, China is focusing on raising productivity through investments in human capital, R&D, and reforms to encourage more productive investment and increase household consumption. Attracting overseas talent and addressing skill mismatches are also priorities. - While a sudden economic hard landing is unlikely in the near future due to China's financial resilience, slower productivity growth poses a long term risk to maintaining

1. Chinese Economic Slowdown and New
Sources of Economic Development
Tony Fang
Stephen Jarislowsky Chair in Economicand Cultural Transformation
University of Toronto, Memorial University of Newfoundland, & IZA
1st International Workshop on the Chinese Development Model
The Chinese Development and Modernization Experience: Defying mainstream
economic theories to achieve unprecedented progress
IQS School of Management, Universitat Ramon Llull
Barcelona, Spain, July 7-8, 2022

2. Research Team

3. Research Team

4. Now and Then…
• China was the world’s largest economy in 1820 – and is the second largest
economy today
• China lifted more people out of poverty than any other country
• China experienced a marked slow-down of GDP growth
• The private sector is the main driver of growth and employment
• China is developing middle class consumers
• China is the world’s largest exporter and the second largest importer of
merchandise goods
• China is the third largest provider and the top receiver of foreign direct
investment (FDI)

6. Figure 2. Share of World GDP (%) of China and U.S
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
China U.S.
24.75%
17.4%

7. Three Stages of Competitive Development
• Three stages of competitive development (Michael Porter: The
Competitive Advantages of Nations, 1990)
• The first is the factor-driven stage and competitive advantages are
low-cost labour and unprocessed natural resources. Value added is
minimum: 1979-2006
• The second is the investment-driven stage. Firms begin producing
more sophisticated goods and services: 2007-2014
• The third is the innovation-driven stage. Firms compete on global
level by producing innovative products and services: 2007-ongoing

8. Figure 3. The Dragon Slows

9. Stephen Jarislowsky chair in Culturaland Economic Transformation MAY 12, 2021
19.3
20.3
21.9
23.5
24.9
27.4
30
32.6
35
36.7
38.4
18
23
28
33
38
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Figure 4. The median age of the Chinese
population from 1970 -2020

10. Main Sources of Economic Development
• Investment (43.5% in 2020, 60% in infrastructure and property
development)
• Consumption (less than 40% of GDP, global average in other
countries: 60%)
• Trade surplus (5% of GDP)

11. Figure5. Foreign Trade Growth Rates (Perkins, 2016, 2019)
Export
GrowthRate Import GrowthRate
(percentper year)
1979-
1989 25 25.1
1990-
1999 23.5 20.1
2000-
2007 25.8 24.5
2008-
2012 10.9 13.7
2013-
2014 6.9 3.8
2015 -2.8 -14.1

12. Figure 6. Household Consumption as Share of GDP
in Select East Asia Economies
0
10
20
30
40
50
60
70
80
90
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
China
Hong Kong
Japan
Korea
Malaysia
Singapore

13. Figure 7. Gross Capital Formation as Share of GDP in Select East
Asian Economies
0
10
20
30
40
50
60
China
Hong Kong SAR, China
Japan
Korea, Rep.
Malaysia
Singapore
Thailand

14. Implied Rate of Return to Capital (from growth accounting
equation): Perkins, 2016, 2019
AggregateCapital
Output Ratio
Rate of
Return to
Capital*
1979--
1996 1.91 22.56%
1997-2005 1.89 22.79%
2006-2011 2.3 18.68%
2012-2014 2.85 15.10%
* Assumes MPK x K/O = .43

15. China: Supply Side Sources of
Growth (Perkins, 2016)
Growth Rate
(%)
Contribution to
Growth (%)
Period GDP
Fixed
Capital
Raw
Labor
Educati
on
Enhanc
ed
Labor TFP Capital
Educati
on
Enhanc
ed
Labor TFP
1953-
1957 6.5 1.9 1.2 1.7 4.7 12.7 14.9 72.4
1958-
1978 3.9 6.7 2 2.7 -0.5 73.7 39.7 -13.4
1978-
2005 9.5 9.6 1.9 2.7 3.8 43.7 16.2 40.1
2006-
2011 11 15.2 0.4 2.1 3.3 59.4 10.9 29.7
2012-
2015 7.4 11.9 0.4 2.1 1.1 69.1 16.2 14.7

16. Recent Economic Forecasting (Rajah and
Leng, 2022)

18. China’s rise and the future world economy

19. Five Paths Forward
• Maintain status quo: high-level growth fueled by non-productive
investment, inflated debt burden- unsustainable
• No new investment: economic contraction, lower GDP growth to 2-3%.
May be politically unacceptable
• Raising trade surplus: hard to do, 1% of world GDP (need 3% per year). Belt
and Road Initiative: a blue-sky strategy to create new markets for Chinese
goods and services and excessive capital investment for potential higher
return
• Moving towards productive investment: human capital, R&D, advanced
technologies, private business investment,etc.
• Raising the share of consumptionto GDP: labour share is low (wages,
salaries, other income, and transfers), constraining consumption power.
Anti-poverty measures and common prosperity policies focus on income
redistribution from the wealthy to the poor and middle class, need strong
incentives & major transformation in social/political/economicinstitutions

20. A Hard Landing is Unlikely Anytime Soon
• Most hard landing stories start from one financial problem or another.
Current problem: massive buildup of debt combined with the financial
institutions are using to get around capital requirements, and government
regulations, etc.
• But the financial problems of the present as well as the past have mostly
involved debt owed by one Chinese entity to another. Those kinds of debt
can always be dealt with without a sharp recession by printing money.
• One has to combine these financial stories with rising foreign debt and
weak foreign exchange reserves to get to a financial crisis and recession.
That could happen in a few years but not with forex reserves of $3.22
trillion and very limited foreign debt (January 2022).

21. The Real Problem
• The continued effort to avoid politically difficult decisions with
continuous bail outs is itself leading to conditions that could slow
GDP growth below catch up levels.
• But the financial bail outs are only part of the problem.
• The sources of rapid growth in the past (high TFP growth) are largely
gone.
• The shift from a Soviet type economy to a market economy, the
technically easy parts, has been accomplished.
• Rapid export growth has also come virtually to a halt.

22. The Major Challenges
• Maintaining high productivity growth and a high rate of return to
capital investment through rapid implementation of major market
oriented reforms
• Large expenditures on human capital, research and development
that produce innovations that are implemented and can also keep
productivity and the rate of return up.
• But there is a structural feature to China’s economy that, together
with the way the government is handling the problems it creates,
threatens to slow productivity growth and the rate of return to
capital.

23. What are the major HC problems？
• Education and Training
New Sources of Economic Development?
• Ageing population and ageing workforce
• Skill mismatches (university graduates; second generation
migrants): skills required by the high-tech manufacturing;
rising of digital economy and platform employment
• Quantity vs. Quality of human capital: consequences of
enrolment expansions (Taiwan)
• Graduate employability, innovation skills
• Top talents in STEM fields (bottlenecks)
• More on-the-job training, apprentice program (Germany)

24. What are some possible solutions?
• Education and Training:New Sources of Economic
Development?
• Relaxation of the Hukou system: increased job mobility and
reduced skill mismatch
• Subsidies to technical skill training, especially to rural
residents and for high-tech manufacturing, to reduce
educational inequality
• Early Child Development: new sources of economic
development (James Heckman)
• Global talent management: focus on high-end technological
and managerial talents to mitigate the top talent bottlenecks

25. China produces more S&E degrees than US

26. • The mismatch between jobs and skills will become the main problem in the
Chinese labour market
• There is a huge demand for innovative, applied, and technologicaltalents in
high-tech manufacturing and digital economy
• The share of skilled workers has risen to about 30% of workforce,it remains
low compared with other manufacturingpowerhouses
• Another way to assess the strength of HC and economicsophistication is the
return of its Diaspora (comparison of China and Ireland in the transition to
the innovation-competition wave): From Brain Drain (Jagdish Bhagwati,
Columbia, 1970s) to Brain Gain (Robert Lucas, Chicago, 1990s) to Brain
Circulation (AnnaLee Saxenian,Berkeley,2000)
Skill Mismatch and High Demand for Applied Technological Talents

27. Local
Government
Agency
Financial
Institutions
Information
exchange
Consulting
Regulating
Source supporting
Professionalservice
Financial service
Financial support
Funding
Relationship between Applied University and other
stakeholders
Research
University/
institution
Business
sector
Applied
University
Innovation
Growth
Local
economy
Local
Society
Relationshipbetween Applied University and other
stakeholders
Relationship among Stakeholders

28. • Presidential Young Investigator Award (CAREER) and Presidential Early
Career Awards for Scientists and Engineers (PECASE)(USA, offering funding
up to $640,000 over a 5-year period for junior researchers)
• In 2000, the Government of Canada created a permanent program to
establish 2,000 research professorships (Canada Research Chairs, $300
million) in Canadian universities.
• Federation Fellowship Program (Australia, $221,261 annum)
• Marie Curie Program (EU, $410,161 annum)
• Humboldt Research Awards (Germany, valued at 60,000 EUR over 1-year
period)
• One Hundred Talent Program ($450,000 over 3-year period) Cheung Kong
Scholar Program ($200,000 over 3-year period), Thousand Talent Program
($450,000 startup + $100,000 annum) (China)
2022-09-20 @ Qiang Zha 28
Global Talent Programs

29. • Members of National Academy of Sciences: 80+；
• Members of National Academy of Engineering: 140+。
• Professors of Chinese decent teaching at American top universities such
as Harvard, Princeton/ Yale/ Cornell/ Brown: 100+
• About 200,000 Chinese 985 university graduates working in the US, 61%
of them served as Senior Engineers or above positions in IT, Internet,
database, and Computer related occupations
Chinese Top Scholars in the US (2019)

30. • The boom of studying in America is striking
• According to the statistics(June, 2018), more than 340,000 students from
China enrolled in US in 2017-18, or 33% of all foreign students
• In the meantime, more Chinese students returned home: over 3.64
million returnees (out of 5.86 million) since 1978
• In 2018, the number of Chinese students returning from overseas
reached 519,400, which was the highest number recorded.
Chinese Students in the U.S. (2018)

31. Number of Returned Overseas Students and the Growth Rate
13.48
18.62
27.29
35.35 36.48
40.91 43.25
48.09
51.94
58.03
77.7
104.89
38.13
46.56
29.53
3.20
12.14
5.72
11.19
8.01
11.73
33.90 34.99
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e
Size (10,000) Growth rate( %)

34. • China has successfullypassed the factor-driven and investment-driven stage of
economic development.The innovation-drive growth is ongoinghas yet
completed
• New sources of economicgrowth: productive investment (HC, R&D), rising
consumption (Common Prosperity),and rising trade surplus (BRI)
• A Hard Landing is Not VeryLikely Anytime Soon
• The real problem:high productivitygrowth and a high rate of return to capital
investment through rapid implementation of major market oriented reforms
• New sources of economicdevelopment from HCD: addressingthe skill
mismatch, improvinglabour mobility, investing in earlychild development,
developingrural human capital, and attracting top talents from overseas
ConcludingRemarks

35. Thank You!
Questions?