IS CHINA’S ECONOMIC GROWTH MODEL SUSTAINABLE

NARANZUL DAGVADORJ

【Abstract】China has been the fastest growing economy over three decades， Increasing investment has been important driver of Chinas economic growth， China can hold its exports rate by the low labor cost but as the inflation rate getting higher， the labor cost shall increase and that is believed to be the main cause of the decrease in export amounts plus the current global crisis. As a country with a tendency to be more trader than buyer， China has already placed in the top in all products set；therefore the economic growth with extremely high labor resource can be sustainable.

【Key words】Economic growth；GDP；Sustainable

In the world， China has been the fastest growing economy over three decades， rising at 10 percent per year in real terms. As a result of Chinas economic reform launched by Deng Xiaoping， real GDP in 2005 was about 12 times the level of GDP in 1978. China has become worlds 2nd largest economy， since Chinas GDP was over Japans.What reasons did affect on Chinas economic growth？ Is it sustainable？

According to Macroeconomics theory， we describe national total product is sum of private consumption，government spending， investment and net export.（Difference of export and import，it shows how terms of trade is）So，what trends has these indicators？Increasing or decreasing？

Increasing investment has been important driver of Chinas economic growth.Since the beginning of the 1990s，Chinas investment rate has trended up.There are high peaks of investment that in 1993 and again in both 2004 and 2005 as a share of GDP reached 43 percent， a highest level in Chinas and other Asian neighbors ever.Since there was a higher saving rate in China than other countries，the investment share of GDP has been increased as we know as Mundell-Fleming theory and capital inflow theory.Due to high saving rate，the foreign investments will increase in next decade.

Next main factor affecting on GDP is terms of trade or net export. It shows difference of export revenues and import losses.China is more trader country than buyer.According to the international trade theory，the products that are being produced are divided into two categories： commodity produced by high skilled labor or low skilled labor.What kind of commodity the country exporting more has an effect on its economic growth and trading circumstances.In 1970 USA and Great Britain were supplying the commodities that needed more skilled labor to the world market.But Asian countries，China and Korea（newly industrializing economies） were exporting agricultural products and raw materials. Since that moment China and Korea have set a goal to make a change to their exporting goods and by the year 1990 they have achieved relatively good result but it was not enough.From 2005，these newly industrializing countries have started to export machine， equipment，electrical devices which require more skilled labor in order to be produced.（It is showed on appendix.） This means，kind of commodity the country is exporting is so important factor to the countrys economic growth.But for China，it need to be considered that the labor force in China is enough and extremely cheap.According to the composition of Chinas export，since there were a lot of machinery products，export revenue will higher in next decade.In other hand， the labor cost （salaries） has risen from 5 percent of GDP to 13 percent in China.So it will affect negatively on export revenue. Besides，exchange rate affects on international trade.As above，if foreign investments increase，exchange rate has appreciated on other foreign currencies.So，if price of products will be higher，net export will lower. Since central bank of China holds their exchange rate in constant interval，its effect has decreased. Furthermore，if exchange rate is sustainable，its effect would be not strongly.

In macroeconomics theory， the households split up their income into 2 categories：consumption and savings.In 2005，private consumption was 38 percent of GDP，the lowest share of any major economy in the world. In other words，a household has more savings than consumption.It affects positively on economic growth as Solow-Swans model.In the same year， household consumptions of other countries were higher than China.For example，there was 70 percent in the US，60 percent in the United Kingdom，and 57 percent in the Japan estimated as more saver country. Furthermore，Chinas government spending in 2005 has more decreased than in the 2000.It has influence positively on economic growth in the long run.So we may say that Chinas economic growth is sustainable as Keyness equation.（Output is sum of private consumption，government spending，investment and net export）

We are being optimistic at Keyness equation， so we may say that Chinas economic growth is sustainable.In other hand，we need to consider about the influence of exchange rate appreciation that harmfully issued to China.

As China holds the exchange rate sustainable（1 dollar equals 6.3 RMB）， it pierces the Chinas economic balance.We call it exchange rate overshooting as international economics theory.Researchers claimed that since the exchange rate overshooting money market loses the balance and moreover keeping economy in this condition affect harmfully. Logic behind Chinas exchange rate holding stands on the concept of not decreasing the export of products and services.By this way， decreasing export of products and services follow bad result，such as loss of its competitive advantage，loss of current account and the serious condition of foreign trade.In addition of that it includes fall of production and increase on unemployment.

On this ground，China will face the difficulty to choose whether to leave its exchange rate not strict and keep this economical unsustainable condition or to cancel holding its exchange rate and decrease the exports. Unfortunately，Chinas economic policy will hold exchange rate as usual. Therefore China will elevate the high inflation rate.China can hold its exports rate by the low labor cost.But as the inflation rate getting higher， the labor cost will increase more.And that will be the main cause of the decrease in export amounts.

From my point of view，I prefer to highlight the long-term than short term on this issue，although the international researchers claimed that Chinas economic growth will lose the speed and will fall in 3 years. China has already placed in the top in all products set.Therefore the economic growth with extremely high labor resource can be sustainable.