Abstract
This paper constructs a theoretical model which captures the recent slowing-down of Chinese economy. In contrast with the previous literature which largely confines its focus on the resource misallocation between inefficient state-owned enterprises (SOEs) and more efficient private firms under a closed economy setting, this paper re-examines the dynamics of the growth of Chinese economy from the perspective of an open economy. In particular, this paper incorporates heterogeneous outputs and relative prices into the model, where private firms are assumed to be the major exporters and the remaining large SOEs create increasing import demand from the home country. By adding downward sloping world demand curve, our paper predicts a turning point during the transition process, as the falling relative price for exports starts to constrain and eventually slow down the growth; SOEs begin to co-exist with private firms in the economy before it is fully transformed. Our paper provides a theoretical foundation in terms of understanding the current dynamics and institutional change of Chinese economy. Additionally, this paper also provides quantitative evidence on the effects of financial development during the China's economic transition process.
Highlights
It is an undeniable fact Chinese economy has been slowing down in the recent years
Constructing a theoretical model, we argue that there exists a turning point during the transition of Chinese economy, as the falling relative price for exports starts to constrain and eventually slow down the growth and state-owned enterprises (SOEs) begin to co-exist with private firms in the economy before it is fully transformed
We add more realistic intratemporal decisions so the domestic consumption/investment consists of two different goods. (SOE and Private firm good) These two extensions allow us to illustrate the relevance of the potential occurrence of a turning point within Chinese economy, after which the economy would slow down caused by the co-existence between SOE sectors and private firms
Summary
It is an undeniable fact Chinese economy has been slowing down in the recent years. The growth of Chinese economy has been persistently biased toward investment and exports. (Lardy, 2007; Kuijs, 2005; Aziz, 2006). The current model adds more realistic intratemporal decisions so that the domestic consumption/investment consists of two different goods In both extensions, the relative price of the exports in terms of f good is determined by the downward sloping demand curve at world market. Our model allows us to conceptualise the growth story for the Chinese economy: During the transition, the expansion of domestic private firms will unambiguously lower the relative price of the exports from home country, because of the downward sloping world demand curve, which will affect the profitability (and later stage investment) of private firms and leads to an unfinished transition after the takeoff Such unfinished transition will lead to the situation under which both SOEs and private firms co-exist in the economy, which contributes to the.
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