Financial Openness and the Chinese Growth Experience

Abstract

We reflect on China's economic performance from the perspective of the experiences of a broad panel of countries. We formulate an econometric framework building on standard growth regressions that allows us to measure the impact of various factors on economic growth and growth variability. As China has become more and more integrated into the world's economic and financial landscape, we devote special attention to measures of (de jure) financial openness. We also document how the real effects of openness are impacted by financial development, political risk, and the quality of institutions. Standard growth regressions cannot explain China's extraordinary growth experience and we fail to find an important role for foreign trade and foreign direct investment. In contrast, the sheer volume of investment has played a significant role in China's growth. As China's per capita GDP continues to grow, it must find sustainable sources of growth. We identify a more efficient financial sector, less state ownership higher quality of government institutions and full financial openness as important factors. Interaction analysis suggests that the beneficial effects of financial openness first require further financial and institutional development. China is less of an outlier in its growth variability experience but achieved high growth with surprisingly low growth volatility.