How Important are Exports and Foreign Direct Investment for Economic Growth in the People's Republic of China?

Abstract

The global financial crisis and the recent growth slowdown in the People’s Republic of China (PRC) have led to questions about the sustainability of PRC growth. The argument is that the PRC is too dependent on external demand and that it needs to rebalance its economy toward domestic consumption. However, conventional measures of external demand—share of net exports and exports as a share of gross domestic product (GDP)—are biased and do not accurately measure the contribution of external demand to GDP growth. In this paper, we propose two measures that are simple modifications of the conventional measures. We argue that our proposed measures provide a more accurate estimate of the vulnerability of the PRC economy to external shocks, in the form of sudden drops in exports and foreign direct investment (FDI). Our estimates show that in 2001 exports and FDI accounted for 18.2% of GDP growth and by 2004 the share had risen to 49%. During 2005–07, the contribution of exports and FDI to growth remained 38%–40%. Our estimates also show that the impressive recovery of the PRC economy in the post-crisis period owed at least 53% of its growth to exports and FDI. Based on these results, we conclude that the PRC economy remains highly dependent on external demand in the form of exports and FDI, and rebalancing the economy toward domestic demand has not yet been achieved.