Spotlight on China.

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The emergence of China onto the world stage has not gone unnoticed in the West. China's GDP is now the fourth largest in the world. MasterCard, recognising the country's importance, has produced ongoing research and analysis of business dynamics, financial policies and regulatory activities focusing on the Asia/Pacific since 2004. Business Asia provides some of the key findings of their reports published in the fourth quarter of last year.

China and sustainable economic growth: Outlook for the next fifteen years

In this series the report looked at the key drivers of China's economic growth in the past, identifying and evaluating their relative strengths and weaknesses, and examined the long-term viability of China's economic growth.

Two categories of growth factors

  1. Input-driven factors--Are straightforward, they mean adding more inputs into the production process; adding more workers and improving their skill levels (human capital); and adding more investment capital in the forms of factories and tools

  2. Total factor productivity (TFP) growth At the simplest level, it refers to efficiency gains from how capital and labor are being used and combined.

An analysis of key growth factors to China's economic growth over the period of 1953 to 2005 found that input-driven growth has been high through the entire period of the last 52 years examined. "It peaked during the 1979 to 1988 period; dropped slightly in the 1989 to 1998 period, then edged up again in the 1999 to 2005 period," the report said.

"In contrast, TFP driven growth was almost non-existent during the earlier 1953 to 1978 (the pre-reform) period. The heavy handed top down central planning approach to managing the economy was clearly the reason behind the lack of TFP-driven growth during that time.

"These results confirm on the one hand that input driven growth has been very important for China's growth up to now. In this regard, critics who lambasted China for relying on the sheer weight of capital and labor to drive economic growth are partially correct. On the other hand, the results also suggest that large gains in efficiency were behind China's economic growth, especially in the post ]978 period.

What factors are behind such significant TFI: growth?

* Urbanization

* Improvement in infrastructure

* Infrastructure development in China

* Foreign trade and management

* Foreign management know-how and skills transfer.

Simulation of China's future economic growth

"Two future scenarios are constructed using the growth accounting analysis to guide the identification and examination of issues that appear critical to China's future economic growth over the 2006 to 2010 and the 2011 to 2020 periods," the report said. "The basic scenario assumes a continuation of current trends, whereas the alternate scenario assumes additional reform efforts to remedy a range of structural imbalances, market distortions, and inefficiencies.

"In the basic scenario, the negative factor for TFP growth--government administration cost is assumed to continue to expand as a share of GDP from 2006 to 2020 at the same rate as in 1999 2005, at about 0.15% per year.

"In contrast, the alternate scenario assumes that government administrative cost will stop expanding in the 2006-2010 period; and then decrease by 0.1% per year over the 2011-2020 period."

"The difference in results between these two scenarios is very significant. The difference in overall economic growth is between 2 to 4% per year over the fifteen-year period; or between growing at 6-8% per year and 9-10% per year.

"Virtually all the difference comes from projections of TFP growth with different assumptions regarding government administrative cost and consumption-to-GDP ratio. In the basic scenario, TFP growth is projected to decline very quickly, whereas it is sustained at the 3%+ level per year in the alternate scenario.

"The conclusion is clear China's high rates of economic growth are likely to be more sustainable if TFP can be kept at the 3%+ level. This will in turn require a reduction in government administrative costs and a rise in the consumption-to-GDP ratio. These two requirements are, however, merely shorthand for a host of reform measures that could impact TFP growth.

What are these measures?"

Reform measures needed for scenario II

* Curbing Excessive Investment

* Curbing Export Dependence

* Curbing Local Governments' Investment

* Continuing Financial Sector Reform

* Maturing of Entrepreneurship

* Rising R&D Investment...

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