There are three main factors behind China’s high economic growth. The first is
the large expansion of exports. The second is the high rate of fixed capital invest-
ment, and the third is the rapid urbanization.
The first factor was made possible by the introduction of a large amount of foreign
loans and foreign direct investment and two devaluations of the Yuan, by 6.8 percent
in 1986 and 50 percent in 1994. China ranked 26th in the world in terms of exports
in 1980, and climbed to be 15th in 1990, accounting for 1.8 percent of world total
exports. In 2000, China rose to the seventh rank, with a 3.9 percent share of world
exports, and in 2005 it surpassed Japan, reaching the third rank and accounting
for 6 percent of world exports. It should be noted that foreign invested enterprises
account for 60 percent of China’s exports (Shinohara, 2003).
The second factor has been a key to China’s high economic growth (Kojima,
2002). Capital investment consists of investment in infrastructure, real estate
construction (including housing), equipment and machinery of enterprises, and
inventory stock. When one compares the GDP share of consumption and investment
in China and Japan over the years. We see that when Japan started its rapid eco-
nomic development, fixed capital formation accounted for 20 percent of her GDP.
This share jumped to more than 35 percent within several years, and remained at
this level until 1975. After the first oil shock, the share fell to around 30 percent,
and continued to be at that level until 1996. Since the end of the Japanese bubble
economy in 1992, the Japanese government has spent a large amount of public
money on infrastructure construction to promote a recovery from the recession,
with little or no positive result.
In China, soon after the Tiananmen Square incident, the ratio of fixed capital
investment to GDP jumped to 32.2 percent in 1992 from 28 percent in the previous
year and remained at the 35 to 38 percent level for several years. Since 1999, this ratio
has risen further, reaching nearly 39 percent in 2002. In 2004, the ratio surpassed
40 percent, reaching 43.8 percent, which is larger than the ratio of household final
consumption to GDP for that year. A ratio of fixed capital investment to GDP above
35 percent is regarded as abnormal in the economic history of advanced countries.
A ratio above 40 percent is perceived to be excessive. As a result of the steady rise in
the share of investment in GDP, the share of household final consumption in GDP
in China fell below 50 percent at the beginning of 1990s. With the onset of the
2000s, this share fell further and by 2004 reached a low of 41.4 percent.
The Japanese household final consumption to GDP ratio is around 60 percent, and
the ratio is similar in Taiwan and Korea. In Western Europe and
the United States, this ratio is around 70 percent. China’s consumption to GDP
ratio is therefore extraordinarily low. One reason is that this ratio is extremely
low in rural areas. This suggests that for a balanced growth, China must find ways
to raise household final demand in rural areas.
If we look at the contribution of household final consumption and gross
fixed capital investment to annual GDP growth rates, in 1992 and 1993,
fixed capital investment contributed to more than half of the
Chinese annual GDP growth. From 1998 onwards, the extent of this contribu-
tion rose further, reaching in some years almost 70 percent (as in 2003). We may
therefore conclude that China’s high growth is led by fixed capital investment.
In China, fixed cap-ital investment is divided into four types, namely (a) new
construction project investment (b) construction for renovation (c) real estate investment,
and (d) other. As we can see, during 1992–1993 and in more recent years (since 2000),
real estate investment has played the most important role among the four types.
Taking 1990 as the benchmark, real estate investment by 2003 has increased by
40-fold, compared to 12.5-fold increase in total fixed capital investment, 13.5-fold
increase in new construction project investment, and 10.4-fold increase in reno-
vation investment. This suggests that China’s high economic growth since 1990
has been led mainly by fixed capital investment, within which investment in real
estate played the main role.
There are three reasons for the expansion of real estate investment. One is the
rapid urbanization; the second is housing construction; and the third is infra-
structure construction. As is well known, beginning in 1961 the Chinese gov-
ernment adopted an anti-urbanization policy (Kojima, 2005). For many years,
population inflows into cities from rural areas were prohibited except for entry
into the army and university. After the dismantling of the people’s communes
at the beginning of the 1980s, peasants began to flow illegally from rural areas
into the cities and designated towns, even though strict restrictions and vari-
ous administrative barriers were in place in the cities. In a sense, the urbaniza-
tion during the 1980s can be understood as a recovery from the effects of the
earlier anti-urbanization policy. In the 1990s, China’s rate of urbanization was
comparable to those of other countries at similar economic level, even though
urban areas still continued to restrict the inflow of peasants. During the decade
of 1990s, the annual rate of increase of non-farming population of both cities and
designated towns proved to be 4.8 percent, a fairly high rate but lower than in
some countries in Africa or Latin America. The elasticity of urbanization to the
GDP growth rate is 0.6, meaning that a 1 percent increase in the real GDP growth
rate leads to a 0.6 percent increase in urban population.
If we look at the decomposition of the Chinese urban population by the
size of cities (and designated towns) and rate of growth growth in cities of
different size. We see that from 1985 to 1994, the rate of growth of population
in cities with populations below 300,000 was quite high. Since 1995, however,
the situation has reversed. These small cities suffered population loss,
while the megalopolis cities experienced the highest population increase.
From this table, we can safely say that China has entered into a period of megalopolis urbanization (Kojima, 2006).
Construction or redevelopment of large cities are however extremely costly.
This is one reason for the increase in fixed capital investment in China. Until 1991, housing con-
struction investment in rural areas was larger than that in urban areas. The reverse
has been the situation since 1992. In urban areas housing construction investment
increased by 22 times between 1990 and 2004, while in rural areas the increase
has been only 3.7 times. The shares of urban and rural housing investment in the
total were 18 and 82 percent, respectively, in 2004 (People’s Bank, 2005).
In addition to the urban housing construction investment, there are the gigan-
tic infrastructure projects. Many big projects were launched in the 1990s. Among
them are the Three Gorges Dam Project, the Great Western Development Project
including natural gas pipelines stretching 4,200 km, the railway project connect-
ing Tibet, a water canal project from a branch of the Yangzi River to the Beijing
area, and industrial and commercial mall and park construction. In the middle
of the 1990s, many transportation and communication national network plans
for express highways, oil and gas pipelines, and optical fiber networks were initi-
ated. These networks have been built at a rapid speed. In 1990, China had just 500
km of express highways. By 2004 this number rose to 34,300 km, making China
second in the world (after the United States with 90,000 km) in terms of the
length of highways. Japan began its construction of highways at the beginning
of 1960s, and completed 8,000 km over four decades. On the other hand at the
current pace of highway construction, China is likely catch up with the United
States within the next decade.
