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A Growth Model with Chinese Characteristics

Interview with Yuan Zhigang by Julien Vercueil et Robert Boyer
Yuan Zhigang, Julien Vercueil et Robert Boyer

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1Professor Yuan Zhigang, born in January 1958, is Dean of the School of Economics at Fudan University. He also serves as Director of Employment and Social Protection Research Center of Fudan University. He received his B.A. and M.A. in Economics from Hangzhou University in 1982 and Fudan University in 1987. He earned his Ph.D. in Economics in 1993 from École des Hautes Études en Sciences Sociales in France. His research fields cover non-equilibrium economic theory, macroeconomics, employment theory and social pension insurance. Professor Yuan Zhigang is a regular contributor to academic journals. He has published eight independent monographs, more than 20 edited books and two translations, in addition to more than 140 articles in many economics journals. He has won many academic honors among them the prestigious “Chang Jiang (Yangtze) Scholar” title in early 2008.

2RR: What are the main theoretical influences on your analyses?

3Growth models applied in transitional economies should be different from those in advanced countries. Macro-economies in most advanced countries are in steady states, while different sectors in transitional economies are still highly unstable. Therefore, structural transformation constitutes an appropriate starting point for analyzing economic growth in emerging countries. In theory, long run economic growth is determined not only by growth in factor inputs, but by enhancing factor allocation efficiency as well. With diminishing returns to factor inputs, raising factor allocation efficiency becomes essential. Growing factor allocation efficiency is the key to economic transitions and growth in many developing countries.

4Improvements in labor allocation efficiency across different sectors in China after 1978 provide a good example. Dual divisions of agricultural and industrial sectors, and rural and urban areas are important characteristics of the planned economy. Reallocations of surplus labor from the agricultural sector to the industrial sector in the 1980s and urbanization in the 1990s explain China’s miracle of 30-year rapid economic growth. Within the urban sector, there were impressive allocation efficiency gains in labor across the state-owned sector and the private sector. With the downsizing of the former and the expansion of the later, labor productivity grew. As a result, high returns to capital could be maintained despite growing capital inputs, which seemingly contradicts the wisdom of traditional neoclassical models.

5However, different from efficiency gains in the labor market, there are huge distortions in the allocation of financial resources. The “political pecking order of financing” creates divisions across different sectors; efficiency gains in capital allocations are greatly constrained. In China, the state-owned sector faces soft budget constraints and has better access to external credit. Meanwhile, private firms are subject to strong discrimination in the credit market and rely heavily on internal financing for further development. With a growing private sector against a shrinking state-owned sector, discrepancies between deposits and bank loans increase. A growing share of the intermediated funds is invested in foreign bonds, contributing to growing foreign surplus. Foreign assets in China are mostly short-term federal reserves with low returns, while liabilities are primarily long-term FDI with high returns, leading to dynamic inefficiency of the macro-economy. Progress in market-oriented reforms in the financial market is critical to improving allocation efficiencies of financial resources.

6RR: What is your interpretation of the post 1978 economic development of China?

7China adopted the “catching-up” strategy before 1978, and operations of the macro-economy were primarily centrally planned. To speed up industrialization and prioritize development of capital-intensive industries, prices of agricultural goods, labor and capital were depressed. As a result, profits of state-owned enterprises (SOEs) increased, accelerating aggregate accumulation of capital. Though industrialization was achieved within a short period time, such a growth pattern was inefficient and unsustainable because it is was established at the cost of farmers’ welfare and household consumption, and moreover investment and industry structures were distorted.

8The planned system was abandoned in 1978, and market-oriented reforms and globalization began to promote economic transition and growth in China. Marked by the significant growth in rural industry and the establishment of a consumption-driven growth pattern, rural China, in the 1980s, constituted the engine for reforms and economic growth. The pricing system of agricultural goods and land systems was reformed in the rural areas, creating large-scale surplus labor in the agricultural sector. This resulted in the growth of rural workers in township and village enterprises (TVEs) and bolstered TVEs tremendous growth. TVEs constituted the catalyst for economic transition in China because they not only promoted economic growth in the 1980s, but also reduced rural-urban income inequality and intensified market competition. In the mid-1990s, promoted by the global division of labor along the global value chain, export-oriented manufacturing industries in China grew significantly, and exports instead of consumption became the new growth engine. Labor with relatively low cost and high productivity are the main reason. On the one hand, large-scale rural-urban migration began in the mid-1990s, and for the first time in history, surplus labor from inland China was leveraged by global capital in the coastal area. On the other hand, beginning in Shanghai, in July 1996, the labor market reform, which was marked by the establishment of re-employment service centers for separating surplus employees of SOEs, was officially initiated. As the employment status of urban residents diversified, labor productivity in industry and services increased rapidly.

9Though the export-oriented economic growth model in China impressed the whole world, both internal and external imbalances resulted. On the one hand, differentiations in residents’ employment and income statuses enlarged income inequality, and consumption’s contribution to economic growth declined. On the other hand, low domestic consumption, together with tremendous growth in production, led to over-capacity, which can be absorbed only by exports. The trade dependency ratio in China kept rising. Risks due to dual imbalances were disguised by rapid economic growth before 2008. In 2008, the global financial crisis broke out, and the resulting shrinking external demand, together with an ageing population, made the export-driven growth model unsustainable. Policy stimuli seemed to be the Chinese government’s only options. With fiscal expansion and accommodating monetary policies, financial resources were allocated to investments in infrastructure and real estate, leading to significant expansion in the balance sheet. Soft budget constraints and asset price bubbles made local governments and real estate companies insensitive to interest rates. As a result, asset prices soared within a short period of time. Investments in the real sector are crowded out by speculative investments, jeopardizing sustainable growth in China.

10RR: You repeatedly emphasize the role of efficiency in the allocation of labor, capital and natural resources. Would it be useful to distinguish between static and dynamic efficiency, the second being the most important for China’s long run trajectory?

11Yes, dynamic efficiency is very important. Factor market reforms do not necessarily lead to gains in dynamic efficiency because factor prices are influenced significantly by expectations, and expectations may amplify risks. In factor market reforms, there is always a trade-off between marketization and government intervention. Unregulated marketization is risky, and there is no textbook answer to what constitutes the best mix of regulatory interventions. To improve government regulation in the context of marketization, a dynamic perspective should be taken.

12Consider financial markets as an example. The trade-off between marketization and government regulation in these markets challenges most countries, even those with highly developed and sophisticated financial markets, as in the US. The financial crisis in 2008 is evidence of regulatory failures in the U.S. Speculative investment and arbitrage prevailed in the financial markets, crowding out investment in the real economy. Not only was allocative efficiency reduced; financial risks were raised as well. Speculative activities were further encouraged by the expectation of “too big to fail”. Therefore, despite the fact that market-oriented reforms in the financial markets improved allocative efficiency, their magnitudes, scope and sustainability are questionable, in retrospect. Regarding China’s financial market, to cultivate a healthy relationship between market and government, it is essential to correct misallocations of financial resources that place excessive priorities on local government financing platforms and SOEs. Under soft budget constraints and asset price bubbles, local governments are insensitive to interest rates. As a result, even if prices of financial resources are determined fully by market rules, allocative efficiency still cannot be improved. Financial market liberalization without addressing soft budget constraint issues would increase risks and undermine efficiency gains in the financial market.

13Apart from the financial market, market-oriented reforms in the land market, especially land capitalization, are deemed to serve as an important impetus for future economic growth. However, similar to the financial market, reforms in the land market do not necessarily lead to dynamic efficiency gains. In urban China, the land market is always linked to the real estate market. The market-oriented reform in the real estate market, in 1998, brought huge vitality to the Chinese economy. However, growing local fiscal deficits induced local governments to become increasingly more dependent revenues from land sales. As a result, it is expected that the housing price bubble in China can be efficiently managed, and inflows of financial resources to the real estate market are thus further encouraged. Bubbles in the real estate market not only raise risks for the macro-economy, but also crowd out investments in other sectors, distorting land allocation and constraining dynamic efficiency gains.

14In rural China, land is collectively owned and cannot be traded. Land capitalization in rural areas will definitely boost economic growth in China tremendously, like what happened in the urban real estate market in 1998. However, the success of land capitalization and the sustainability of efficiency gains depend crucially on policy improvements such as the hukou system. Providing migrant workers equal access to public services in cities is important for promoting “in-depth urbanization.” Land capitalization can never be sustained by urbanization without a wider access to plain citizenship.

15RR: How do you explain the stability of economic dynamism and performance in the context of a continuous flow of reforms, at odds with the transformation of Russia and Eastern Europe?

16China’s growth miracle after 1978 shows the importance of market-oriented reforms and globalization. Market-oriented reforms in rural areas, in the 1980s, marked the starting point of sustainable growth in China. Reforms in the pricing system of agricultural goods, implementation of the household responsibility system, which sustains the public ownership of land while production and management decisions are granted to households through signing long-term contracts, provided an impetus for the early development of TVEs. TVEs played essential roles in creating employment, enhancing rural household income, and reducing the poverty rate. In addition, the earliest forms of partial financial deregulation were also implemented in rural China in the 1980s. Informal finance emerged under deliberate and proactive policy incentives, and rural entrepreneurs gained easier access to formal and informal financing. In the urban area, economic growth in the 1990s, as well as the adoption of an export-oriented development strategy, were mostly the result of globalization and marketization. On the one hand, the global value chain became the new normal for organizing production around the world. Emerging economies, including China, became increasingly more actively involved in globalization. On the other hand, large-scale rural-urban migration began and China’s comparative advantage with low cost labor and high productivity began. China sustained its role as the “World’s Factory” until 2008 when the global financial crisis broke out.

17China has been looking for new growth engines since 2008. Short-term economic growth can be boosted by infrastructure and real estate investments. However, the resulting balance sheet expansions raised financial risks, making economic growth unsustainable. How can we promote sustainable growth in China? I think we should try to find the answer in China’s growth experience in the past 40 years. Market-oriented reforms and globalization are two underpinnings. Market-oriented reforms have almost been completed in the product and labor markets, while there has been little progress in marketization in other factor markets, including land and the financial market. Capitalization of land and more efficient allocations of capital across different sectors, especially across the state-owned sector and private sector, would promote growth tremendously. In addition, entry barriers to manufacturing have been lowered significantly for private and foreign capital. Growing capital and labor inputs, dividends from institutional improvement, and the composition effect from enhancing allocation efficiency, promoted TFP and global competitiveness of China’s manufacturing industries. However, the monopoly power of SOEs in the service sector, especially high-skilled production service industries, is still very strong, impeding innovation and efficiency gains. One of our research projects shows that growth in the production service sector will be enhanced greatly by expanding external demand. Globalization will not only introduce global competition and thus raise efficiency in the service sector, but also create new international service markets such as outsourcing for China. By lowering entry barriers for private and international capital and introducing competition, service industries in China will definitely see significant progress.

18RR: How would you define the present socio-economic regime of China?

19Since the Hu-Wen government launched the people-oriented urbanization and “Scientific Outlook on Development” concept, China has paid more attention to the coordination of economic efficiency and social equity. The central government has increasingly recognized that the underpinning of the domestic-demand-driven economy lies in dealing with problems associated with urbanization.

20First, the permanent urban resident rate of total population has exceeded 50 % since 2011, and China is facing more challenges in providing public services and resources, which is known as “in-depth urbanization” or “citizenization”. In China, there are two kinds of urbanization rates. One is the permanent urban resident rate of total population, which means the urbanization rate of the resident population in terms of their living and working places. The other is the registered permanent urban resident rate of the total population, which is based on people’s registered permanent residence. The household registration system is the institutional foundation for China’s allocation of public services and resources. In the case of the large-scale population leaving their seat of registered permanent residence and seeking employment in other cities, the household registration system becomes a limitation on China’s social mobility. In 2016, the permanent urban resident rate of the total population of China reached 57.35 %, while the registered permanent urban resident rate of the total population was only 41.2 %. That is, of every ten people who live and work in the city, about three cannot enjoy equal access to public resources and thus their personal development, employment decisions and consumer behaviors are negatively affected. The gap between the two urbanization rates has not been reduced in recent years, so the main challenge for China’s urbanization in the future is still reflected in the distribution of public goods and services.

21Second, with China’s industrial upgrading, the massive numbers of rural migrant workers are faced with skill shortages and need re-education and vocational training to form complementary or healthy competitive relationships with the local labor force. However, local governments mainly provide vocational education for the local registered population, while services are actually needed more by migrants.

22Migrants in their current residence are also faced with inadequate supply or lower quality of children’s education, health care, and social security. Educational resources are often the source of the greatest inequities between local population and migrants. Although the central government required in 2001 that migrant children enter public schools in their neighborhood of residence, in practice most migrant children could only enter migrant schools with poor quality or were left-behind which of course, reduced their level of human capital. In fact, “citizenization” in the current stage means not only access to a public welfare system, but also a way of attracting talent. For example, some megacities adopt a points-based household registration system with talent preference, so “citizenization” can show personal abilities needed by city development in this perspective. Migrant children constitute an important part of China’s urbanization in the future and their access to educational resources determines their ability to realize “citizenization” in the future.

23In addition, in some cities, migrants may obtain better access to schools by buying houses, making investments and other means, which further reflects the limits of income and wealth on social mobility. Moreover, the wealth gap between the local population and migrants increases when housing prices are high, low rent housing is insufficient and mainly provided for the registered population. These institutional factors cause the quality of life of migrants and their offspring to deteriorate and weaken their ability to stay in cities.

24On the whole, in order to cope with the extinction of demographic dividends and draw advantages from human capital, China needs to expand social mobility further and strive to solve two challenges. First, the main development challenge facing relatively underdeveloped areas lies in narrowing the gap between urban and rural areas, and a land tenure system is the main tool. The restriction on land transfers not only hinders the increase of agricultural labor productivity, but also forces farmers to migrate. The primary task is to reaffirm land ownership rights. At the end of 2016, China basically legitimized contractual management rights over 850 million acres of rural land, accounting for about 2/3 of rural farmland contracted to households. Second, in relatively developed areas, contradictions between urban and rural areas have basically been solved. The current problem is mainly the challenge of narrowing the gap between local populations and migrants. The principal tool to achieve this objective is the equalization of basic public goods and services, and rights and opportunities. Achieving this objective would improve the flow of production factors across regions. In short, China has made great progress in urbanization. In 2016, 790 million people worked and lived in urban areas, of which 570 million have urban hukou and enjoy basic public welfare and services in their new area of residence. Future development aims to: promote integration of urban and rural areas in underdeveloped areas with the land tenure system as a too; and to eliminate the basic public service gap between the local population and migrants in more developed cities with the household registration system as the key tool.

25RR: Is the conventional opposition between state and markets, economy and polity relevant from your point of view?

26Yes. In the past 40 years, the Chinese government has vigorously promoted reform and opening up in the context of globalization. By doing the right thing at the right time, the Chinese government has achieved great economic growth. Although China’s economic development is considered to be dominated by the government, in fact, the most successful policies of the Chinese government are to strengthen market forces. For example, joining the WTO allows enterprises to compete in international markets, thus improving the efficiency of domestic enterprises. “Grasp the large, let go of the small” reform of state-owned enterprises gives the private economy development space. The monetization reform of housing distribution “crowded in” investments in the real economy. However, till now China has not succeeded in building an efficient market of inputs, leaving many problems unsolved. With the Chinese economic development mode changing from input driven to innovation driven, the opposing forces between government and market have attracted more and more attention. It is also the core problem that we think should be solved in future economic reforms.

27China’s future reform must improve the efficiency of the factors market. Key areas include the transfer of agricultural labor, reform of the land system and allocation of financial resources among enterprises. The solution to these problems requires reducing government interference and overhauling unreasonable systems formed in the past, such as the household registration system and the soft budget constraint on SOEs. Based on that, China should allow markets to allocate resources. The third Plenary Session of the 18th CPC Central Committee proposed that “market play a decisive role in allocating resources”, and China launched the supply side structural reform in 2015. The Chinese government is making an effort to strengthen market forces further and to improve the efficiency of resource allocation.

28Opening up to the international market is also important. Only by integrating the global industry supply chain and participating in global market competition can we really improve the efficiency of domestic enterprises. At the same time, China’s high-end service industry is inefficient and effective supply is far from sufficient, resulting in rising prices of medical, educational and other services. China should promote internal and external opening up of the service industry, thus improving service efficiency and promoting the concentration of talent, capital and other key resources to the service sector.

29RR: What are the main factors that have contributed to the post 2008 Chinese trajectory?

30After 2008, economic recovery of developed countries was slow and the stimulus effect of external demand on China’s economy was obviously weakened. From 2007 to 2016, the contribution of net exports to GDP growth dropped from 10.6 % to -6.8 %, while the proportion of exports to GDP dropped from 34.6 % to 18.6 %. Weakening foreign demand not only directly reduces demand, but also reduces the spillover effect of technology and management from abroad on TFP growth in China. Foreign direct investment (FDI) growth almost ceased, year-by-year growth of FDI dropped from 18.6 % in 2007 to -0.2 % in 2016.

31To achieve economic growth, China has relied more on domestic demand, especially investment demand. Setting a growth target is still an important means for the Chinese government to influence economic development. The newest plan of the Chinese government is to double GDP and per capita income of residents between 2010 and 2020. This also means that the average growth rate of real GDP should be more than 6.5% per year. In the context of weakening external demand, domestic investment, especially infrastructure construction, real estate development, and heavy and chemical industries, have become the main driving force of domestic growth. Although this development strategy can achieve growth targets in the short term and partly meet the needs of full employment and social stability and local government performance, the distortion of the economic structure is increased, especially resource allocation dominated by administrative command.

32The institutional dividend from the earlier stage gradually decreased, while macro policy choices now face the dilemma of growth stabilization and risk prevention. The dividend of structural reform in the earlier stage has gradually weakened, which has become the key problem of China’s economic growth slow down. In terms of opening up to the outside world, China has entered the WTO and been integrated into the global industrial supply chain for more than 15 years. Space for further growth of trade in goods is limited, while openness of the service industry still lags behind. As for internal reform, the series of structural reforms of 1998 is now unable to cope with the new distorted structure of the current Chinese economy. State owned monopolies in upstream industries, the real estate bubble, government monopoly of land supply and local government debt problems require a new round of structural reform. At present, due to backward structural reforms, the Chinese government faces a dilemma of growth stabilization and risk prevention. To stabilize economic growth, we must continue to rely on traditional momentum supported by credit, as with infrastructure and real estate. But as distortion of economic structure becomes more serious, the overall economic leverage level will also rise and even systemic financial risks will be triggered.

33RR: Will the transition to a new domestic led regime be easy or do you observe a legacy and “hysteresis” of the previous investment and export led growth? 

34State sector monopoly and distortion in the allocation of factors of production are important characteristics of China’s traditional economic growth mode dominated by investment and export. These two characteristics have an important impact on the current transformation of China’s economic growth.

35The state-owned sector dominates China’s investment driven economic growth, and the spillover effect of economic rebound is limited to the private sector. Current investment growth in the Chinese economy is still oriented toward the state-owned sector. On the demand side of investment, the government stimulates infrastructure construction and local governments monopolize land supply in real estate development. On the supply side, SOEs monopolize heavy and chemical industries, such as oil, coal, iron and steel, which are the upstream industry of the manufacturing supply chain. Compared with the state-owned sector, the private sector is often in the terminal areas of the manufacturing supply chain, such as textiles, food and household appliances. Currently, growth stabilization policies of the Chinese government stimulate investment, prices of upstream industrial products are recovering, which is good for the state-owned sector in the upstream part of the supply chain, but improvement in performance of the private sector in the downstream part of supply chain is limited. Since 2016, the rebound in domestic demand has led to the substantial rebound in the price of raw materials. In the first quarter of 2017, profits of state-owned industrial enterprises grew by 69.5 %, 55 percentage points higher than those of private industrial enterprises. Recovery of the private economy in the downstream part of the supply chain is weak, suggesting that consumer demand has not yet fully revived. Economic stabilization driven by investment is hard to sustain.

36Factor allocation distortion leads to structural imbalances and drags down the pace of China’s economic transformation. Factor allocation distortion is to some extent beneficial to China’s investment-and-export-driven growth. In the labor market, the household registration system limits migrant workers’ access to local public goods and stimulates export of labor-intensive products through low wages. In the land market, local governments monopolize land supply, establish development zones to attract investment, and at the same time push up real estate investment growth rate through high land prices. In the financial market, low cost funds keep flowing into the state-owned sector with soft budget constraints and promote investment growth. At present, investment-and-export-driven economic growth is unsustainable and resource allocation distortion has become a great obstacle to Chinese economic transformation. Labor income growth is slow and land prices push up real estate prices, thus curbing consumption. Human capital accumulation is too slow and difficult to meet the needs of the developing modern service industry. Use of funds is inefficient, which leads to continuous financial risk accumulation.

37China’s economic transformation depends on further structural reforms, and “new momentum” may be a breakthrough. The reform of SOEs and factor markets is key to China’s economic transformation. At present, the emphasis of reform of SOEs is to improve the efficiency of SOEs by mixed ownership. It is also important to break the monopoly of SOEs in some sectors and promote level competition in the market. At the same time, in addition to the ongoing household registration system reform and interest rate marketization, land market reform has become a key point of improving China’s factor allocation efficiency. In particular, farmers’ land entering the market not only increases their income and promotes urbanization, but also brings a huge increase in capital stock of China’s economy and injects persistent momentum into China’s economic growth. In the short term, many new types of operation, new industries and new products have emerged in China, and “the new economy” may become a breakthrough for China’s economic transformation. In the first quarter of 2017, output of China’s industrial robots, optoelectronic devices and photovoltaic cells increased, respectively, by 55,1 %, 51,6% and 18,8 %. The growth of the new economy drives up overall economic growth and promotes the formation of capital with higher production efficiency. Its effect is also spilling over to traditional industries and management of enterprises in these industries is improving. In 2016, the service sector’s contribution to GDP growth reached 58.4 %, and the contribution of consumer expenditure to GDP growth reached 64.6 %.

38RR: How do domestic transformations relate to changing international relations?

39The transformation of China’s economic growth is faced with a totally new external environment: the Chinese economy is deeply integrated into the global industrial supply chain, enterprises hope to invest overseas, anti-globalization trends appear in some developed countries, and trade protectionism re-emerges.

40Chinese enterprises need to leave China to promote the status of China’s manufacturing industry in the global industry supply chain and increase returns to domestic capital. To take advantage of the demographic dividend, China put both ends of the production process (the supply of raw materials and the marketing of products) on the world market. With a weakening demographic dividend, the export of traditional labor-intensive products is difficult to sustain, and China’s manufacturing industry is faced with the plight of domestic overcapacity and low investment returns. Chinese enterprises hope to carry out overseas investment upgrading, develop China’s own multinational companies, transfer the processing and assembling part of the industrial supply chain to other countries and leave high value-added production such as innovation and R&D in China. At present, Chinese enterprises possess technology, management and funds for the industrial transfer to other countries, but they lack experience in overseas investment, as well as the infrastructure needed for production in other countries (such as ports and pipelines). China proposed the Belt and Road in 2013, and established the Asian Infrastructure Investment Bank (AIIB) in 2015, and has been actively promoting infrastructure construction in emerging economies. Through these measures, China is preparing for overseas layout of domestic enterprises, thus forming China’s overseas industrial chain and improving domestic capital returns. In this sense, the overseas layout of Chinese enterprises is not only the export of commodities and production capacity, but also the export of China’s services and technologies.

41China’s economic rebalancing is confronted with trade protectionism, and opening up to the outside world is still a good way to force domestic reform. Due to the imbalance in the domestic economy, China’s savings have long been greater than its investments, resulting in a sustained trade surplus and accumulation of foreign exchange reserves. Some developed countries, especially the United States, are moving toward greater trade protectionism. Nearly 50 % of the trade deficit of the United States comes from China, so the Trump administration believes that China-US trade is unfair. At present, according to the trade policy of the Trump administration, the United States does not want to hit import of light industrial products and electronic products, which rely heavily on China. Instead, the U.S. wants to promote export of agricultural products, energy and services to China in order to narrow the China-US trade balance. In fact, reducing the scale of trade surplus and realizing economic rebalancing based on consumption growth are also important targets of China’s economic transition. China does not want to see a setback in the global industrial supply chain caused by protectionism, since continuing to open up its economy is a necessary means of forcing domestic reform. Joining WTO in 2002 significantly increased the level of competition in its domestic market. In the future, opening up part of the product market (such as automobile and beef) and the service industry is beneficial to breaking down entry barriers, increasing domestic production efficiency, and promoting increased consumption and service industry development.

42RR: Do you think that China will continue in the future to explore a sui generis socio-economic regime or that it will rather converge towards a more conventional configuration?

43Growth and development patterns in China have proved to be unique, or I would like to call it “the growth model with Chinese characteristics”.

44First, like the growth experience of other developed countries, market-oriented development, globalization, together with the government’s “visible hand”, constitute impetus for economic growth in China. To be sure, we will not return to a planned economy. As for development goals, China shares similarities with other countries, such as promoting employment, enhancing economic efficiency while sustaining social mobility and equality, expanding the middle-income group (otherwise known as forming an olive-shaped society), and promoting inclusive growth, etc. China has been persistently promoting these goals since reform and opening up.

45Second, China has shown its own characteristics in development. On the one hand, China’s history, natural endowments, culture and political system are distinctly different from developed countries. On the other hand, and more importantly, rapid transitions in China’s social, population and economic structures raise new problems for economists. The answers cannot be found in traditional economic models. In particular, China is experiencing population aging and a shrinking demographic dividend when its level of development is comparatively low. Income and wealth effects are contributing to the rising Gini coefficient; the welfare gap between urban and rural residents is increasing because of the hukou system and land tenure system, leading to declines in social mobility; the newly-formed middle-class lacks vitality; with increasing regional income gaps, how to achieve relatively equal provision of basic public goods and establish cross-region transfer mechanisms challenges the wisdom of the Chinese government; and factor markets must be reformed despite a slow down in economic growth under the “new normal”. All these challenges that China faces are more complicated than those confronted by most developed countries, calling for breakthroughs in macroeconomic research.

46These are the issues that should be addressed in “the growth model with Chinese characteristics”. Studies on China’s growth pattern are important not only for China, but also for many other developing countries facing similar challenges.

47RR: Thank you very much, Professor Yuan Zhigang, for your precise and insightful answers to our questions!

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Yuan Zhigang, Julien Vercueil et Robert Boyer, « A Growth Model with Chinese Characteristics »Revue de la régulation [En ligne], 21 | 1er semestre / Spring 2017, mis en ligne le 20 juin 2017, consulté le 25 avril 2024. URL : ; DOI :

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