is 2012 an end or a beginning - a story of china's economic cycle

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Macroeconomy Report

November 22, 2011 China RESEARCH Is 2012 an End or a Beginning?

A Story of Chin a’s Economic Cycle

Wensheng PENGSFC CE Ref: ARI892

[email protected]

Tun LINSFC CE Ref: AWE515

[email protected]

Yang [email protected]

Bin DUSFC CE Ref: AYK088

[email protected]

Highlights

By reviewing China’s economic growth and the business cycles in the past thirty years, this

report attempts to answer questions such as: Is the current economic slowdown a short-term

cyclical phenomenon or the beginning of a long-term downward trend? How can the

fine-tuning of macroeconomic policy strike a balance between maintaining growth and preventing a rebound of inflation?

We find that, at present, China’s economy is at the juncture of a long-term slowdown in

aggregate supply and a short-term moderation in aggregate demand. From a long-term

perspective, China’s potential growth rate is bound to decline due to supply side constraints.

From a short-term perspective, sluggish external demand and investment, together with

subsequent cyclical policy expansion, are driving a business cycle - GDP growth will slow

down to 8.4% in 2012, before picking up mildly to 9% in 2013.

Expansion of aggregate supply, especially productivity gains derived from structural reforms

is the main source of China’s long-term economic growth. Over the past 30 years, the three

episodes of rapid total factor productivity (TFP) growth were all related to structuralreforms. Currently, the potential growth rate has slowed to ~9%, and will fall visibly in the

next 10 years.

► The slowdown mainly reflects gradually fading globalization dividends associated with

China's WTO accession, reduced room in the transfer of rural labor, and the housing

bubble’s squeeze on the real economy.

► Going forward, productivity gains will depend on deepening structural reforms. We

estimate that potential growth rate will drop to 5.5~7.5% in 2020, depending on the

progress of reforms.

Aggregate demand fluctuations, together with counter-cyclical policies, have been shaping

China’s short-term business cycles since the mid-1990s, as the country transitioned from ashortage economy to an economy with adequate supply. We expect to see a turning point in

the short-term cycle in 2012, with growth bottoming before it picks up slightly.

► Slowing export and investment growth will weigh on aggregate demand. Export is

constrained with weak external demand, while investment slowdown is due to the

de-bubbling of the property sector and de-leveraging of industrial sector.

► The risk of a hard-landing is small, as recent falling inflation gives the government a lot

more room to spur growth. Government-led investment is supported by counter-cyclical

policy and the 12th FYP, which will help the economy accelerate in 2013. However, the

acceleration is likely to be mild, due to the decline in potential growth rate and the need

to control inflation.



CICC Research: November 22, 2011


2

Contents

Reform drives China’s long-term economic cycle ..................................................................................... 4

Productivity gain is the main driver of rapid growth.................................................................................. 4

Potential growth rate has dropped visibly................................................................................................. 7 Structural reform can prevent a sharp slowdown in economic growth ..................................................... 8 China is at an initial stage of long-term slowdown.................................................................................. 10

Short-term economic cycle is driven by external shocks and macroeconomic adjustment................ 12

Short-term cyclical fluctuations are characteristics of a market economy .............................................. 12 Aggregate demand growth loses steam in the short term...................................................................... 14 The government has more policy space to spur growth......................................................................... 18 Which position in the short-term cycle will 2012 be?.............................................................................. 19

Figures

Figure 1: TFP growth is a key driver of China ’s economic growth .............................................................................5

Figure 2: TFP growth is the main driver of the three rapid-growth periods ................................................................5 Figure 3: The three episodes of rapid pick-up in potential growth rate were all related to reforms............................6 Figure 4: The globalization dividends associated with WTO accession are already limited ......................................6 Figure 5: The amount of transferrable rural labor has dropped significantly..............................................................7 Figure 6: Land prices have risen rapidly.....................................................................................................................7 Figure 7: China’s capital stock per capita is still relatively low ...................................................................................8 Figure 8: China’s demographic structure leads to a high saving rate and thus a high investment rate.....................8 Figure 9: Working-age population growth slowing................................................................................................... 10 Figure 10: China still lags behind in terms of factors that influence the TFP .......................................................... 10 Figure 11: TFP growth depends on reform efforts ....................................................................................................11 Figure 12: Estimate of China’s potential growth rate in the next decade .................................................................11 Figure 13: Comparison of economic growth under various levels of GDP per capita ..............................................11

Figure 14: Economic fluctuations are relatively mild in a market economy..............................................................11 Figure 15: Investment and external demand are the main sources of economic fluctuations ................................ 13 Figure 16: Political cycle in infrastructure investment.............................................................................................. 13 Figure 17: Infrastructure investment is increased to counter external shocks ........................................................ 14 Figure 18: Credit growth leads economic growth by 1~2 quarters.......................................................................... 14 Figure 19: Economic growth leads inflation by 3~4 quarters................................................................................... 15 Figure 20: The OECD leading indicator points to further slowdown in China’s export growth................................ 15 Figure 21: Private housing sales growth leads housing starts growth .................................................................... 16 Figure 22: Growth of real estate GFA under construction may slow significantly ................................................... 16 Figure 23: Close correlation between private housing GFA under construction and real estate development

investment ................................................................................................................................................. 16 Figure 24: Investment leverage ratio at historic highs............................................................................................. 16 Figure 25: Business inventories have long been declining ..................................................................................... 17 Figure 26: Capacity utilization rate in key industries remains relatively low............................................................ 17 Figure 27: Trade surplus and fixed capital formation move in opposite directions.................................................. 18 Figure 28: No significant correlation between industry relocation and overall manufacturing investment.............. 18





3

Introduction

China is seeing inflation enter a downward trend, while economic growth continues to slowdown. External demand is likely to remain sluggish due to the European debt crisis, while

domestic demand will likely be dragged by investment slowdown due to weakness in the

property market. Investors now want to know how deep and how long this round of economic

slowdown will be; and whether it is a short-term cyclical phenomenon or the beginning of a

long-term trend. Related to this question, how can fine-tuning macro policy strike a balance

between maintaining growth and preventing a rebound of inflation?

This report reviews China’s economic growth and fluctuations since the country’s reform and

opening up, especially after the establishment of the market economy in the mid-1990s, in an

attempt to find patterns to help us determine future economic trends. We look at both

long-term growth trends and short-term cyclical fluctuations. Short-term cyclical fluctuations

mainly reflect aggregate demand growth and the impacts of macroeconomic policies adopted

to manage aggregate demand; while long-term growth trends mainly depend on the

economy’s supply capacity and are more related to structural factors and policies. Unlike

mature markets, in a fast-growing emerging market, changes in supply capacity often have a

significant impact on economic fluctuations.





4

Reform drives China’s long-term economic cycle

Three key issues need to be understood to determine China’s long-term economic cycle:What are the main drivers of China’s rapid economic growth since the reform and opening up?

Have changes in these factors led to a decline in China’s potential growth rate, and by how

much? And, what other factors do we need to watch out for to predict future growth trends?

We try to answer these three questions in this chapter.

► After deconstructing China’s economic growth (adjusted with HP filter) over the past 30

years, we found that China’s economic growth has relied more on productivity gains

(total factor productivity, or TFP growth); while the three historical episodes of rapid

TFP growth were all related to institutional and structural reforms.

► Our analysis shows that China’s potential growth rate has slowed from ~10% during the

11th FYP to ~9%, mainly due to: gradually fading globalization dividends associated

with China’s WTO accession; the property bubble’s squeeze on the real economy; and

the decreasing rural labor surplus, thus meaning there is less room in productivity

improvement via labor transfer.

► Looking ahead, China is at an initial stage of long-term economic slowdown. The slower

labor transfer will become a more significant constraint to TFP growth; and economic

growth will rely more on structural reforms. We discuss two scenarios for future growth:

baseline scenario and reform scenario. Under the reform scenario, R&D, education, and

government effectiveness will improve notably, removing institutional and policy

constraints to labor mobility. Under the two cases, the potential growth rate in 2020 will

fall to 5.5% and 7.5% respectively

Productivity gains are the main driver of rapid growth

From the structural point of view, the TFP growth is a key driving force of China’s

economic growth. According to Growth Accounting, from the supply side, a country’s

economic growth can be split into three components: Labor growth, capital growth and TFP

growth1. We can find out the main growth driver by comparing the respective contributions

these three factors make. Based on the findings of Park and Park (2010), we break down and

compare various countries’ economic growth from 1992 to 2007. The results show TFP

growth contributes ~50% to China’s GDP growth (labor contributes 6% and capital 43%),

well above that of advanced economies and Asian emerging markets (Figure 1). TFP growth

contributes only ~1/3 to GDP growth in the four Asian tigers, and 1/5 in other Asiandeveloping countries. This suggests TFP growth has been a key contributor to China’s

economic growth in the past 20 years2.

1 In general, TPF reflects technological progress and improvements in efficiency from an economic perspective, and is affected by various factors, such as R&D, stock of

knowhow, social capital, government efficiency, economic system and culture. Mathematically speaking, it is a residual in growth accounting, or the part of GDP growth not

explained by labor and capital growth.2 Park and Park (2010) mainly use data from Penn World Table 6.3 and the ILO Laborsta database; and GDP and investment are estimated based on of PPP. We use the NBS’

GDP, employment and investment data to deconstruct China’s economic growth; capital stock is estimated based on the Perpetual Inventory Method (depreciation rate at 4%),

employment figures prior to 1990 are smoothing results. Our findings are similar to those of Park and Park (2010): TFP growth contributes 43% to China’s economic growth, labor

contributes 4% and capital 53%. Also, labor elasticity to economic growth is an important parameter and is estimated at 0.4 (based on reference to Chow and Li, 2002). Our

sensitivity analysis shows the changes of this parameter in the range of 0.4~0.6 may lead to a slight increase in labor’s contribution, but will not impact the overall results to any

meaningful extent.





5

Besides cross-country comparison, we also break down the sources of China’s economic

growth each year (Figure 2). As we can see from the chart, over the past 30 years, there were

three periods of economic acceleration: early 1980s; early 1990s; and the 2000s prior to the

global financial crisis. Labor and capital growth were relatively stable during all these three

periods, while TFP growth was the main growth driver.

Technically, the TFP growth here is a residual, i.e. the part of GDP growth that is not

explained by labor and capital growth. However, annual GDP growth is to a large extent

affected by demand changes, meaning annual TFP growth also reflects short-term changes in

aggregate demand, rather than just productivity changes. In order to remove the effect of

demand changes, we often use a filtering (smoothing) method to get the trend growth of TFP

and combine that with labor and capital changes to estimate the potential growth rate.

Figure 1: TFP growth is a key driver of China ’ s

economic growth

Figure 2: TFP growth is the main driver of the three

rapid-growth periods

Contributions to GDP growth: 1992-2007

0

2

4

6

8

10

12

%

Capital Labor TFP GDP growth

UK, France,

Germany, US

Japan Four

NIES

China 7 Asian developing

countries

Contributions to GDP growth in China

-3

0

3

6

9

12

15

1979 1983 1987 1991 1995 1999 2003 2007 2011

%Labor Capital TFP GDP growth

Source: Park and Park (2010), CICC Research 7 Asian developing countries: India, Indonesia, Vietnam, Pakistan,Philippine, Thailand, Malaysia

Source: CEIC, CICC Research





6

The three episodes of a rapid pick-up in the potential growth rate were all related to

reforms. We use an HP filter to estimate the potential growth rate over the past 30 years

(Figure 3). The results show there were three episodes of rapid pick-up in the potential

growth rate; and they all coincided with the TFP growth, mainly reflecting the dividends of

structural reforms. The potential growth rate all declined afterwards as reform dividends

waned.

► In the early 1980s, China kicked off rural reforms, in particular the household contract

responsibility system reform, which significantly boosted agricultural productivity. The

potential growth rate jumped from 8.7% in 1980 to 9.8% in 1986. The average GDP

growth over these seven years was as high as 9.4%, 41% of which was contributed by

TFP growth.

► In the early 1990s, China stepped up its reform with Deng Xiaoping’s ‘Southern Tour’

speech and the decision to establish a “socialist market economic system”. The potential

growth rate rose from 9.8% in the early 1990s to 10.3% in 1994. The average GDP

growth rate over these five years reached 10.1%, 30% of which came from TFP growth.

► In the early 21st century, China’s accession to the WTO further increased its trade

openness. The potential growth rate again jumped from 9.8% in 2001 to 10.7% in 2006.

The average GDP growth over these six years was 10.4%, 37% of which was contributed

by TFP growth (Figure 3).

It is worth noting that China’s WTO accession has boosted TFP from two aspects: First, with

the expansion of foreign trade and foreign investment in China, Chinese enterprises have

become fully engaged in global competition and enhanced productivity by improving

technology and management. Second, export expansion facilitated the transfer of rural

surplus labor, thereby spurring labor productivity growth. In the mid-1990s, China’s

economy was confronted with dual challenges of severely insufficient demand relative to

potential production capacity and massive unemployment, as its working-age population

gradually outnumbered net consumers and there was a large amount of surplus labor in rural

areas. The WTO accession provided opportunities for China to reach its supply potential.

Figure 3: The three episodes of rapid pick-up in

potential growth rate were all related to reforms

Figure 4: The globalization dividends associated with

WTO accession are already limited

Potential output (H-P filter)

8

9

10

11

12

1981 1986 1991 1996 2001 2006 2011

%

Implementation of

reform/opening-up and

household responsibility

system

Join WTOSouthern tour speech

and proposed shift to

a soc ialist market

economy

Openness（total value of exports and import/GDP）

20

30

40

50

60

70

1985 1990 1995 2000 2005 2010

%

China joined

the WTO

Source: CEIC, CICC Research Source: CEIC, CICC Research





7

Potential growth rate has dropped visibly

The potential growth rate has fallen visibly, from >10% during the 11th FYP to ~9%

now. Our estimates show the drop has been more significant since 2008, due to three reasons:

► Globalization dividends associated with China’s WTO accession has gradually been

released. China’s openness (trade-to-GDP ratio) has risen significantly since its WTO

accession, up from <40% in the late 1990s to >60% before the global financial crisis,

which is well above that of other large economies, indicating limited upside potential 3.

In the wake of the global financial crisis, China’s openness has decreased significantly to

~50% due to weak external demand. As China returns to a continental economy, this is

an inevitable phenomenon and indicates more balanced growth in aggregate demand.

But on the other hand, this also suggests productivity improvement will come less from

international competition, but rely more on a good domestic competitive environment

(Figure 4).

► The amount of transferrable rural labor is gradually decreasing. Evidence of this is

the number of rural surplus labor (aged 15~35, idle or semi-idle farmers) has declined

visibly, from 130mn in 1990 to 30mn now (estimate4), meaning there are fewer people

who shift to non-agricultural sectors (Figure 5). This is set to constrain TFP growth, as

labor mobility between sectors and rural-urban areas has served as an important driver of

TFP growth in the past 20 years.

► Property bubble’s squeeze on the real economy. The run-away land and home prices

in recent years have pushed up rents and dampened consumption. The excessive

investment demand for housing reduced the efficiency of resource allocation and

exacerbated the gap between the rich and poor and especially the gap between rural and

urban areas. The negative impacts on the real economy will accumulate gradually along

with the rising home prices (Figure 6).

Figure 5: The amount of transferrable rural labor has

dropped significantly

Figure 6: Land prices have risen rapidly

Estimated rural labor aged 15-35 available for transfer

0

20

40

60

80

100

120

140

1990 1994 1998 2002 2006 2010

Million

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Yuan/Sqm

0

5

10

15

20

25

30

35

40%

Average price of land puchased

Growth (RHS)

Source: Yang (2009), CEIC, CICC Research Source: CEIC, CICC Research

3 According to Wu Jinglian (2010), China conducted reforms in many areas in the early 1990s, including taxation, financial system reform, foreign exchange management,

corporate structure and social security, and made enormous progress in the set-up of the macroeconomic system and ownership reform.4 In terms of openness, China is much higher than the US, Japan, the UK, France, India and Russia, and only lower than Germany. China’s share of world trade is also high, now

at ~9%, vs. a peak of 11% for Germany, 8% for Japan, and 15% for the US in the past 30 years.





8

Structural reform can prevent a sharp slowdown in economic growth

To predict China’s future economic growth, we need to analyze trends in capital, labor and

TFP. Overall, we believe a drastic drop in investment growth is unlikely; labor growth will

decelerate gradually along with the aging population, but the drag on economic growth willmainly be reflected by slower labor mobility (due to declines in rural surplus labor) that will

weigh on productivity growth; but reforms that are conducive to R&D, education and

government effectiveness can help enhance TFP

Investment will not likely slow drastically and will serve as a source of support to

economic growth. After the rapid growth over the past 30 years, China has accumulated a

large amount of capital and is now seeing the marginal return of investment gradually

diminish5. But, will investment growth fall sharply over the next decade? We believe there

are two main factors that will prevent this from happening:

► Capital stock per capita is still low, leaving plenty of room to catch-up. Currently,

China’s capital stock per capita is well below that of advanced economies. For example,

in 2008, China’s capital stock per capita was only 17% of Japan’s and 18% of the US’s.It was also lower than that of Taiwan and South Korea 6 suggesting substantial

investment is still needed to achieve an economic catch-up (Figure 7)

► China’s demographic structure leads to a high savings rate, which is conducive to

investment from the supply side. Currently China’s ratio of producers (aged 25~64) to

net consumers (aged <25 or >64) is ~128%, and will continue to increase until 2015.

Such demographic structure means the saving rate will not decline significantly in the

future and will stay relatively high. The Feldstein-Horioka puzzle (1980) argues that

saving and investment rates are correlated, even in advanced economies with free

international capital flows. They are even more closely correlated in China, which has a

large population and not fully liberalized capital account (Figure 8).

Figure 7: China ’ s capital stock per capita is still

relatively low

Figure 8: China ’ s demographic structure leads to a high

saving rate and thus a high investment rate

Physical capital stock per capita (2008)

0

20

40

60

80

100

120

India Brazil China Taiw an Korea US Australia Japan

$, thous and PPP

30

35

40

45

50

55

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

%

60

70

80

90

100

110

120

130

140

150 Producer/Net consumer

Saving/GDP (RHS)Investment/GDP (RHS)

Source: Penn Would Table 7.0 (2010), CICC Research Source: Haver Analytics, CEIC, CICC Research

5 We estimate the number of people engaged in agriculture based on the official statistics of rural employment, and calculate the number of young adults engaged in agriculture

based on the estimated proportion of young adults. A large portion of these young adults need to engage in agricultural production and only ~40% are transferable (i.e. part-timeyoung adults), according to estimates made by Ma Xiaohe and Ma Jianlei (2007). We also estimate the number of idle young adults in rural areas (not included in ruralemployment). The total number of transferable young adults in rural areas is the sum of part-time and idle young adults.6 A measure of capital efficiency is the incremental capital output ratio. The lower the ratio is, the higher the efficiency of investment. In 2010, China’s per unit of GDP required

3.4 units of investment, lower than other developing countries in Asia (the Philippines 1.9, Malaysia 1.9, Indonesia 2.5, India 2.5) and closer to developed countries in Europe and North America and advanced economies in Asia (Germany 4.2, US 3.9, Canada 3.8, UK 3.5, South Korea 3.2, Taiwan 2.7, Hong Kong 3.1). This suggests China is roughly between comparable developing countries and advanced economies in terms of investment efficiency.





9

Decelerating labor force growth has limited impact on economic growth, but a

slowdown in the transfer of rural labor will limit TFP improvement. Changes in the

working-age population will cause labor growth to slow. China’s working-age population

grew at an average pace of 2.7% in the 1980s, 1.3% in the 1990s and 1.3% since 2000, but

the average growth in the next 10 years is estimated at just <0.2%. It is expected that China’s

working-age population growth will gradually decline to zero by ~2016 (Figure 9). The effectof changes in the size of the labor force on economic growth may be hard to estimate using a

simple model, as the transfer of labor between different sectors will also influence

productivity. Generally speaking, compared to changes in the size of the labor force, the

slowdown in the transfer of labor from the agricultural sector to secondary and tertiary

sectors may have a greater impact on future economic growth.

Our rough estimates show transferable rural labor declined from 130mn in 1990 to 80mn in

2000, and only 30mn in 2010. With the decline in the proportion of young population, the

amount of transferable labor in rural areas will fall further, and the transfer potential will

shrink, since agricultural production has a minimum labor demand. The speed of, and the

potential for, labor transfer not only hinges on the size and age structure of the labor force,

but are also related to the urban and rural household registration systems, the businessenvironment for private enterprises, social security for migrant workers, and the living costs

in urban areas. The factors other than labor supply itself depend on future policies.

There are difficulties in quantifying the negative impact of slowing labor transfer on future

economic growth, including the lack of data and uncertainties in policy. But the past

experience of labor transfer may serve as a reference. The past three decades can roughly be

divided into four periods in terms of the government’s attitude towards labor transfer. In the

first period (1978~1981), rural reform had just begun and rural household registration control

was still strict. In the second period (1982~1993), the government relaxed the rural-urban

migration policy along with the development of township and village enterprises, and as a

result a lot of labor moved from agricultural to non-agricultural sectors and from rural to

urban areas. In the third period (1994~1998), many provinces imposed new limits on migrant

workers7. In the fourth period (1999~2005), the limits on migrant workers were lifted and the

transfer of labor out of the agricultural sector and rural areas accelerated. According to our

observations, the average growth of TFP in the two periods with loosened labor mobility

controls was 3.4%, ~0.4ppt faster than the growth recorded in the two periods with tighter

controls. Excluding the impact of other factors (e.g. education, R&D, government

effectiveness, etc.), the difference is ~0.3ppt.

Reform can enhance the TFP. Studies on the experience of other countries show growth of

R&D capital stock, increase of average years of schooling, and government effectiveness

have statistically significant effects on TFP growth (Lee and Hong, 2010 and Park and Park,

2010). China still lags far behind developed countries in these areas (Figure 10).

► China’s R&D investment and R&D capital stock are low. In 2007, China’s R&Dinvestment as a percentage of GDP was only 1.4%, lower than Germany (2.5%), Japan

(3.4%), and the US (2.7%). The gap in R&D capital stock between China and developed

countries is even larger due to years of lower R&D investment.

► China’s education level is still relatively low. In 2010, the average years of schooling

for China’s population aged over 15 were 8.2 years, significantly lower than the US

(12.2 years), Japan (11.6 years), and South Korea (11.8 years).

7 According to Yong Congmin’s study (2009), the population mobility was restricted in 1994~1998 and the government encouraged migrant workers to take jobs nearby. Many

places introduced measures aimed at protecting the interests of urban residents. Shanghai imposed limits on the employment of non-local workers in 1995, and Beijing and

Guangzhou also took similar measures in 1997.





10

► China’s government and related public services are less efficient. According to the

World Bank’s government effectiveness index8, China’s score in 2010 was only 0.12 (on

a scale from -2.5 to 2.5), much lower than the 1.4~1.5 for developed countries.

Figure 9: Working-age population growth slowing Figure 10: China still lags behind in terms of factors that

influence the TFP

Working age population（15-64）

-1

0

1

2

3

4

1980 1985 1990 1995 2000 2005 2010 2015 2020

%R&D expenditure

(% of GDP, 2007)

Avg. year of total

schooling aged

15+

Government

Effectiveness

(2010)

China 1.4 8.2 0.12

India 0.8 5.1 -0.01

US 2.7 12.2 1.44

Japan 3.4 11.6 1.4

Germany 2.5 11.8 1.55

UK 1.8 9.6 1.56

Korea 3.2 11.8 1.19

Source: Haver Analytics, CICC Research Source: WDI, Barro and Lee (2010), Haver Analytics, CICC Research

China is at an initial stage of long-term slowdown

China’s growth in the future: Baseline scenario and reform scenario. We estimate the

possible range of economic growth in the next 10 years based on the projected growth of China’s working-age population in the next 10 years, the capital stock growth trend in the

past 10 years, and two scenarios for TFP. The main difference between the baseline scenario

and reform scenario for TFP is the different assumptions for its key determinants (i.e. labor

transfer, R&D, education, and government efficiency). In the baseline scenario, we assume

R&D, education and government effectiveness improve at the same rates as they did in

2001~2007. In the reform scenario, we assume these factors improve at an accelerated pace to

catch up with the US9 (Figure 11). Also, in this scenario, institutional/policy restrictions on

labor mobility are gradually removed10. The results of these two scenarios are (Figure 12):

► Baseline scenario: Average potential growth at ~8% during the 12th FYP, 6.0% during

the 13th FYP, and 5.5% in 2020.

► Reform scenario: Average potential growth at ~9.0% during the 12 th FYP, 8.0% duringthe 13th FYP, and 7.5% in 2020.

This not only suggests an economic slowdown is inevitable, but also indicates substantial

room for reform. The scenario analysis is subject to great uncertainty, but this seemingly

simple simulation suggests that: first, growth slowdown is inevitable, due both to the

demographic changes and the diminishing catch-up effects after becoming a mid-income

country; and secondly, there is plenty of room for productivity improvement via institutional

8 The government effectiveness index compiled by the Word Bank takes into account the quality of the government’s public services, the competence of public servants, the

government’s ability to make and execute policy, and the government’s credibility. The index is on a scale from -2.5 to 2.5. The higher the index is, the more effective the

government is.9

Assume the gap in R&D capital stock between China and the US narrows 2% per annum and the enrollment rates at all stages of education rise exponentially.10We make no specific assumptions as to which policy/institutional limits on labor mobility will be relaxed, when they will be relaxed, or how they will be relaxed. We just split the impact of

these factors on TFP growth evenly between the baseline and reform scenarios, based on 0.5% of empirical value.





11

and structural reforms, which cannot prevent a slowdown, but can avoid a sharp slowdown. If

we say China’s productivity gains in the past 10 years mainly resulted from global

competition and labor transfer, the improvement of productivity in the next 10 years will

depend more on a reduction of institutional thickets, an increase of competition and an

improvement of the efficiency of resource allocation.

Our view of China’s slowdown in the next decade is consistent with international

experiences. China’s nominal GDP per capita reached US$4,300 in 2010 and is expected to

exceed US$5,000 in 2011. Based on the experiences of Hong Kong, Japan, South Korea,

Singapore, and Taiwan, the economic growth tends to slow 1~3ppt when GDP per capita hits

US$5,000~13,000. In comparison, our baseline scenario implies a 3.4ppt drop in economic

growth, and our reform scenario implies a 2ppt drop, roughly consistent with international

experiences. (Figure 13)

Figure 11: TFP growth depends on reform efforts Figure 12: Estimate of China ’ s potential growth rate in

the next decade

Contribution of TFP to output growth

0

2

4

6

8

1981-

1990

1991-

2000

2002-

2007

2011-

2020

2011-

2020

%

Reform

scenario

Baseline

scenario

Growth of potential output

5

6

7

8

9

10

11

1980 1985 1990 1995 2000 2005 2010 2015 2020

%Bas eline scenario Reform scenario

Source: Lee and Hong (2010), CICC Research Source: Lee and Hong (2010), CICC Research

Figure 13: Comparison of economic growth under

various levels of GDP per capita

Figure 14: Economic fluctuations are relatively mild in a

market economy

0

2

4

6

8

10

12

Hong Kong

SAR, China

Japan Korea Singapore Taiw an China

%GDP per capita < USD 5000

GDP per capita >USD 5000 and <USD 13000 2001-

20102011-

2020

1971-

19791976-

1986

1966-

1975

1976-

1986

1977-

19881989-

2003

1971-

1980

1987-

1996

1981-

19901978-

1987

Reall GDP growth rate with different GDP per capita Gap between growth and potential rate

-8

-6

-4

-2

0

2

4

6

1978 1982 1986 1990 1994 1998 2002 2006 2010

%

Deng Xiaoping's

southern tour

Asia

financial

crisis

Global

financial

crisis

Source: WEO, CICC Research Source: Lee and Hong (2010), CEIC, CICC Research





12

Short-term economic cycle is driven by external shocksand macroeconomic adjustments

Short-term cyclical fluctuations are characteristics of a market economy

The short-term cyclical fluctuations in China’s economy around its long-term growth trend

since its reform and opening-up have demonstrated several distinctive features. Studying the

drivers of short-term cycles since the establishment of a market economy in the mid-1990s

will help us predict future economic trends.

1. Short-term fluctuations in the market economy are much milder than before

With Deng Xiaoping’s Southern Tour speech in 1992 as the watershed, China’s economyafter the reform and opening-up is divided into two distinct stages: The planned economy

before 1992, and the socialist market economy afterwards. The economy experienced

significant fluctuations in the first stage, with GDP growth peaking at 15.2% and bottoming

at 3.8%. The economic cycle was relatively short and mainly driven by the government’s

economic plan, which caused inflexibility and disorder in the economy. In the second stage,

China’s economic fluctuations were much milder, with GDP growth peaking at 14.2% and

bottoming at 7.6%. The frequency of fluctuations also dropped (Figure 14).

We believe there are two reasons for the stark differences in economic cycles between the

planned economy and market economy:

► Market prices play a greater role in resource allocation. Prior to 1992, resource

allocation in China’s economy was subject to government planning. State-owned

enterprises were not facing the market and were keen on increasing investment and

production once policy was relaxed. There were no constraints on their expansion due to

inflexible resource prices. And, when economic expansion became unsustainable due to

resource bottlenecks, the government would be forced to shift its stance, which would

lead to a plunge in the production of state-owned enterprises and sharp fluctuations in

economic growth. After the establishment of a market economy in 1992, product prices

are largely determined by the market, and the flexibility of the pricing system has

significantly increased. In response to supply or demand changes, prices will adjust

accordingly, influencing consumption and investment behavior, buffering the

supply/demand impact to some extent and reducing fluctuations of economic activity.

► Demand replaces supply as the main constraint of economic growth. As Chinatransitioned from a shortage economy into an economy with abundant supply after the

mid-1990s, the main constraint on economic growth is no longer supply shortage, but

insufficient demand. This provides more room for the government to use

counter-cyclical macroeconomic policies to manage aggregate demand, thereby reducing

the economy’s cyclical fluctuations. As mentioned in the previous section, the expansion

of the economy’s supply capacity is driven by two main factors: 1) productivity

improvement via economic reform; and, 2) larger working-age population than net

consumers, as well as the transfer of rural surplus labor.





13

2. Exports and investment become the main drivers of short-term cyclical

fluctuations

As the main constraint on the economy shifted from supply shortage to insufficient demand,

short-term cyclical fluctuations in the economy are mainly reflected by changes in aggregatedemand. As for the three main drivers of aggregate demand, exports and investment are more

volatile, while the contribution of consumption to GDP growth is relatively stable (Figure 15).

Since 1995, consumption’s contribution to GDP growth is 4.6ppt on average, with a high of

6ppt and a low of 3.4ppt, and its impact on economic growth fluctuation is far smaller than

those of exports and investment.

► External demand shocks caused economic growth to bottom. Since 1995, net

exports’ contribution to GDP growth is 0.9ppt on average, relatively small. But it has

been very volatile: the highest point is 4.2ppt while the lowest is -3.6ppt. The lows for

China’s GDP growth since 1995 were recorded in 1999 and 2009, both the result of

external shocks. The 1997~1998 Asian financial crisis and the 2008~2009 global

financial crisis both led to a plunge in China’s exports.

► Investment’s contribution to GDP growth is volatile. Since 1995, the contribution of

investment to GDP growth is 4.5ppt on average, with a high of 8.4ppt and a low of

1.7ppt. Compared to exports that are mainly affected by external shocks, the reasons for

investment fluctuations are more complex. Real estate and manufacturing investments

are mainly made by enterprises, and their fluctuations reflect both their own cyclicality

and the impact of macro policy, especially monetary policy. Infrastructure investment is

mainly made by the government and is more affected by fiscal policy.

Figure 15: Investment and external demand are the

main sources of economic fluctuations

Figure 16: Political cycle in infrastructure investment

-10

-5

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005 2010

%Final Consumption Gross Capital Formation

Net Export GDP Growth Rate

0

5

10

15

20

25

30

35

40

45

50

1992 1997 2002 2007 2012 2017

%Real growth rate of Infrastructural investment

9 thFYP

1996-2000

10th FYP

2001-2005

11th FYP

2006-2010

12th FYP

2011-2015

15th National

congress

16th National

congress

17th National

congress

18th National

congress

Source: CEIC, CICC Research Source: CEIC, Wind, CICC Research

3. Macro policy is counter-cyclical and also reflects the political cycle’s impact

In a market economy, macro policy mainly comprises of fiscal policy and monetary policy,

with the focus on aggregate demand management. It mainly affects investment in China.

Fiscal policy has a direct impact on government-led infrastructure investment, while

monetary policy influences a wider range of investment by changing the monetary and credit

conditions. The macro policy trajectory since 1995 suggests investment fluctuations reflect

not only counter-cyclical policy response to external shocks, but also the impact of the political cycle.





14

► There are political cycles in government-led investment. Infrastructure investment is

mainly made by the government and its growth depends primarily on fiscal policy. The

growth of infrastructure investment since 1995 shows there is a political cycle in fiscal

policy (Figure 16). Such political cycles are evidenced by the impacts of administration

changes and FYPs on infrastructure investment, which sees a round of sharp acceleration

in each government’s term of office or each FYP period. The acceleration generallyoccurs in the first year of a government’s term of office or in the mid-term of a FYP

period.

► However, monetary policy has clear counter-cyclical characteristics, particularly

when there are external shocks. The three rounds of major economic stimulus since

1995 were all launched in response to substantial downside risks arising from external

shocks (Figure 17). In order to prevent a sharp economic slowdown amid external

shocks, monetary policy is loosened significantly to support domestic demand, and the

effect is mainly on investment. Conversely, when aggregate demand grows too quickly

and inflationary pressure builds up, monetary policy is tightened to curb the growth of

aggregate demand by slowing investment.

► The lagged effect of macro policy on growth and inflation is one of the underlying

causes of cyclical fluctuations in the economy. Historical data shows there was a

significant lag in the effect of monetary policy on economic growth and inflation. Credit

growth generally leads economic growth by 1~2 quarters (Figure 18) and economic

growth leads inflation by 3~4 quarters (Figure 19). If the lagged effect of policy

combined with external shocks in the same direction (for example, policy tightening

meets a sudden drop in external demand), the fluctuation in the economy could be

greater than policy makers desire, and vice versa.

Figure 17: Infrastructure investment is increased to

counter external shocks

Figure 18: Credit growth leads economic growth by 1~2

quarters

0

5

10

15

20

25

30

35

40

45

50

1995 1997 1999 2001 2003 2005 2007 2009 2011

%

-20

-10

0

10

20

30

40

50%

Real growth rate of infrastructural investment (LHS)Real growth rate of exports (RHS)

Asia

financial

crisis

Global

financial

crisis

SARS

0

5

10

15

20

25

30

35

40

45

1997 1999 2001 2003 2005 2007 2009 2011

%

6

7

8

9

10

11

12

13

14

15

16%

Rmb loans real YoY, 2 quarters ago (LHS)

GDP YoY (RHS)

Source: CEIC, Wind, CICC Research Source: CEIC, CICC Research

Aggregate demand growth loses steam in the short term

Based on the above analysis and recent developments at home and abroad, our view about

short-term growth is that weak external demand and slower real estate investment will

eventually affect manufacturing investment, dampening aggregate demand’s growth

momentum.





15

First, the sluggish external demand indicates exports’ contribution to GDP growth will

decline. From a short-term perspective, export growth depends mainly on the growth of

external demand. The outlook for the global economy, especially developed countries, does

not look good due to the impact of the Eurozone debt crisis. The OECD leading indicator,

which is closely correlated with China’s export growth (Figure 20), has been falling recently,

pointing to the risk of a slowdown in China’s export growth in the near term. In our macroeconomic outlook report published in April 2011 (please see the report: Growth

slowing, inflation control campaign extended ), we predicted that the contribution of net

exports to GDP growth in 2011 would be negative. The recent export growth trend is largely

in line with our expectations. We maintain our forecast that export growth in 2012 will slow

to 10% and net exports’ contribution to GDP growth will be -0.6ppt.

Figure 19: Economic growth leads inflation by 3~4

quarters

Figure 20: The OECD leading indicator points to further

slowdown in China ’ s export growth

2

4

6

8

10

12

14

16

1978 1982 1986 1990 1994 1998 2002 2006 2010

%

-10

-5

0

5

10

15

20

25%GDP (LHS) CPI (RHS)

-15

-10

-5

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

-30

-20

-10

0

10

20

30

40

50%OECD leading indicator YoY (LHS)

Export volume YoY, 3-month average (RHS)

Source: CEIC, CICC Research Source: CEIC, Bloomberg, CICC Research

Second, deleveraging will reduce growth momentum in investment. China’s investment

consists of four parts: Infrastructure construction, real estate, manufacturing, and others,

which accounted for 22%, 25%, 34% and 19% of FAI (year to date). Infrastructure

investment is mainly made by the government and its growth depends primarily on fiscal

policy; the other three parts of investment are mainly made by enterprises and are more

subject to market conditions and the economic cycle under existing macro policies.

Investment growth is likely to slow in 2012, judging from its inherent momentum.

► The contraction of property bubble will drag down real estate investment growth.

As the property tightening measures gradually kick in, the growth of property sales in

GFA terms has decelerated significantly this year, indicating a possible sharp decline in private housing starts GFA next year (Figure 21). A considerable part of housing starts

this year are public housing (>10mn units). However, the target of public housing starts

next year may be 6~8mn units, according to the Ministry of Housing and the Ministry of

Urban-Rural Development (MoHURD). A large decline in public housing starts may

lead to negative growth of overall housing starts GFA next year. Based on the

relationship between GFA under construction and new starts, we estimate the growth of

GFA under construction next year will slow significantly, but is unlikely to slip into

negative territory (Figure 22). This, together with the stable correlation between real

estate development investment and GFA under construction, point to an around 15%

YoY growth in real estate development investment in 2012, vs. the 31% growth over the

first ten months of this year (Figure 23).





16

► Deleveraging may weigh on manufacturing investment. FAI in the manufacturing

sector remains strong this year, mainly reflecting continued business investment

expansion driven by loose monetary conditions over the past two years, as well as the

lagged boost from the previous fast growth of real estate investment and exports. The

manufacturing investment leverage ratio is currently at historic highs (Figure 24). Given

the tightened monetary conditions this year, the negative impact of the cooling exportand real estate sectors on manufacturing investment will eventually be felt. Corporate

profits have been already affected, as industrial enterprises recently see slower profit

growth. Growth expectations in earnings are unlikely to improve significantly any time

soon, discouraging for corporate investment.

Figure 21: Private housing sales growth leads housing

starts growth

Figure 22: Growth of real estate GFA under construction

may slow significantly

-40

-20

0

20

40

60

80

100

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%Floor space newly-started YoY, 3-month average

Floor space sold YoY, 3-month average

-20

-10

0

10

20

30

40

50

1999 2001 2003 2005 2007 2009 2011

%GFA under construction

GFA newly-started


Figure 23: Close correlation between private housing

GFA under construction and real estate development

investment

Figure 24: Investment leverage ratio at historic highs

10

15

20

25

30

35

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%GFA under construction YoY

Real estate development investment YoY

2

2.5

3

3.5

4

4.5

2003 2004 2005 2006 2007 2008 2009 2010 2011

xLeverage of FAI fund source






17

► In addition to FAI, changes of inventories are also part of capital formation and often

have an impact on short-term cyclical fluctuations in the economy. As inventories

(inputs and finished goods an enterprise has to hold to ensure smooth production and

sales) are part of idle resources, enterprises will minimize unnecessary inventories

economically. Reflecting such efforts as well as the improvement of enterprises’

management skills, China’s inventory to sales ratio has long been declining (Figure 25).From a short-term perspective, the wave of inventory adjustment triggered by the 2008

financial crisis has already faded away, and the recent inventory adjustment shows no

signs of impulse, causing little impact on investment growth.

Production capacity shortage is not the starting point for a new round of investment

cycle. In addition to the abovementioned cyclical factors, capacity shortage or surplus is

often cited as a structural factor in analyzing FAI. First, the capacity utilization rate itself is

a cyclical phenomenon: It is high when demand is strong and low when growth is weak.

Therefore, only capacity shortage beyond the normal cyclical economic fluctuations could

lead to a new business investment cycle. Is China now facing continued capacity shortage

that is beyond economic cyclical fluctuations? Our answer is ‘no’. The capacity utilization

rate is now relatively low in China’s electrical machinery manufacturing, ferrous andnonferrous metal smelting industries (Figure 26), which account for a large proportion of FAI.

Overcapacity in key industries, or the absence of an apparent capacity shortage, does not

support the start of a new round of large-scale investment.

Figure 25: Business inventories have long been

declining

Figure 26: Capacity utilization rate in key industries

remains relatively low

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

monthly salesInventory-sales-ratio of industrial enterprises

4200

4400

4600

4800

5000

5200

5400

5600

1996 1998 2000 2002 2004 2006 2008 2010

hours

60

70

80

90

100

110%

Utilization of power generating equipment (LHS)

Utilization rate of crude steel (RHS)

Utilization rate of aluminium (RHS)


From a macro perspective, some analyses cite the sharp drop in China’s trade surplus inrecent years as evidence of a production capacity shortage. Their logic is that trade surplus

is total output minus domestic demand (consumption and investment), and the reduced trade

surplus suggests production capacity declines relative to domestic demand (Figure 27). But

there are two errors in such logic: Firstly, declines in trade surplus may stem from reduced

external demand or increased domestic demand. The decline in China’s trade surplus since

2007 mainly reflected export slowdown; and the domestic demand growth did not accelerate

much. And, secondly, in terms of domestic demand, investment has been growing faster

than consumption, with an even wider gap in recent years. Investment will increase future

production capacity.





18

Another structural factor that may influence FAI is the relocation of the manufacturing

industry from the eastern coastal areas to central/western regions, which to some extent

supports the growth of manufacturing investment. However, this factor has existed for

several years and is unlikely to offset the impact of the slowing export and real estate sectors

on manufacturing investment. Historical data shows no significant correlation between the

speed of industry relocation and growth in manufacturing investment (Figure 28).

Figure 27: Trade surplus and fixed capital formation

move in opposite directions

Figure 28: No significant correlation between industry

relocation and overall manufacturing investment

32

34

36

3840

42

44

46

48

50

52

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

%

1

2

3

4

5

6

7

8

9

10%

Capital formation as % of GDP (LHS)

Trade surplus as % of GDP (RHS)

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010 2011

%

24

26

28

30

32

34

36

38

40%YoY difference between FAI in eastern

and central-to-west region (LHS)

Manufacturing FAI YoY (RHS)


The government has more policy bullets to spur growth

The above analysis shows the growth momentum in demand is relatively weak, but theauthorities have begun to fine-tune their macro policies. Should external shocks intensify, the

authorities may step up policy adjustment to bolster economic growth.

► Falling inflation provides policy makers more room to support growth. Judging

from the political cycle revealed by the historical data, 2012 is unlikely to see strong

expansion of infrastructure investment, but the authorities will likely continue to adopt

counter-cyclical macro policies. A positive development in recent months is that

inflation has been falling off, providing room for the government to support growth.

► There is room for the authorities to loosen monetary policy if necessary, considering

the RRR is at a record high of 21.5% and major state-owned banks are subject to tight

credit controls. Macro-prudential regulations (e.g. regulatory requirements on banks’loan to deposit ratio and capital adequacy ratio) have also played a role in curbing credit

expansion in the past year. But macro-prudential regulations themselves are also

counter-cyclical, and unlikely to conflict with macro policy.

► As to the fiscal policy, structural tax cuts are worth attention . The government’s tax

revenue increased rapidly in the past few years. Considering the 12th FYP goals to

improve people’s well-being and adjust the economic structure, there is significant room

for structural tax cuts. Indeed, the recent tax reform trials indicate the policy direction of

tax cuts, though their impact on the overall tax burden is limited in the short term. We

expect there will be further tax reform initiatives to bring about substantial tax

reductions for businesses and particularly the private sector.





19

The government has enough policy bullets to spur growth, but a large-scale stimulus is

unlikely. The extremely loose monetary and fiscal policies of 2008~2009 caused a series of

side effects. In particular, the excessive expansion of money and credit relative to the size of

the economy set the stage for the subsequent inflation acceleration and asset bubbles. The

property tightening campaign is at a critical juncture and the possibility of relaxation is low.

Despite the controversy over some administrative control measures, we believe the curbs onthe property market will remain in place for a long time, considering the high savings tend to

fuel investment demand for real estate, and the urban-rural dual structure means rising

property prices have implications for social equity during China’s urbanization process. From

a long-term perspective, the government may replace the purchase and price limits with

market-based measures, especially tax policies. But short term, with the loosening of

monetary and credit policies, relaxation of administrative measures becomes even less likely;

otherwise loosened monetary conditions would easily fuel the investment and speculative

demand for real estate and reflate the property bubble.

Which position in the short-term cycle will China be at in 2012?

A basic conclusion from the above analysis is that sluggish external demand and investment

deleveraging will lead to weaker growth momentum in China’s exports and investment

(especially real estate investment) in 2012, making it quite likely for 2012’s economic growth

to slow from that of 2011. However, the risk of a hard landing is low as counter-cyclical

macro policies will help cushion the slowdown in growth. Our baseline forecast is that

economic growth will slow to 8.4% in 2012 from 9.2% in 2011, with QoQ growth to pick up

later in the year but YoY growth to hit the bottom around mid-2012. We expect growth to

recover modestly to 9% in 2013, which may be slightly higher than the potential growth rate

at the time, but should not be a severe overheating.

First, based on the historical pattern, we expect the government-led infrastructure investment

to accelerate markedly in 2013 (mid-term of the 12th FYP period). The positive effect of

local government reshuffle on investment may be fully felt in 2013.

Second, deleverage in the property sector will likely continue for some time and weigh on

real estate-related investment. There is large uncertainty as to how long the process will

continue. But our basic view is that a sharp deceleration in real estate investment and

counter-cyclical policy tightening are unlikely to concur. If slowing real estate investment

exerts a big drag on economic growth, there will be room for the government to boost

aggregate demand.

Finally, we believe the European debt crisis poses greater downside risks to the global

economy in 2012 than in 2013, though there are many uncertainties. Recent developments

suggest the market is unlikely to give Europe much time to resolve its debt crisis. The US

will likely face fiscal tightening pressure in 2013, but to what extent will depend on itsgrowth at the time. For emerging markets which have just experienced the latest round of

inflation, our basic view is that their governments still have room to support growth.

To sum up, we believe the current slowdown is part of both the long-term trend and the

short-term down-cycle. From a long-term perspective, China’s potential growth rate is likely

to slow markedly in the next 10 years due to: 1) Much less labor in rural areas to transfer into

the industrial sector; and, 2) the waning effect of entering WTO. From a short-term

perspective, export growth will likely decelerate due to weak external demand, and

deleverage in property and industrial investment will weigh on economic growth; but the

government now has more room to spur growth. We expect the economic growth to hit the

bottom of this ongoing short-term cycle in 2012, before recovering modestly in 2013. A

return to the >10% growth seen in the past decade is unlikely due to the lower growth

potential.





20

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Liu, Shijin, Trap or Barrier—Challenges and Strategic Options for China’s Economy,

Comparison, 54th edition, 2011

Ma, Xiaohe and Ma Jianlei, How Much Labor Surplus Is There in Rural China? China Rural

Economy, 2007 (12)

Wu, Jinglian, The Sixty Years of China’s Economy, Sichuan Reform, 2010 (2)

Yang, Congmin, A Study of the Scale of Migrant Workers Since Reform and Opening-up,

Discovery, 2009 (4)

Barro, R. and J-W. Lee., 2010, “A New Data Set of Educational Attainment in the World”,

1950-2010. NBER Working Paper No. 15902, National Bureau of Economics Research,

Massachusetts.

Chow, Gregory C. and Kui-Wai Li., 2002, “China’s Economic Growth: 1952–2010”,

Economic Development and Cultural Change, 51 (1) October: 247-256.

Feldstein, M., and C. Horioka, 1980, “Domestic Saving and International Capital Flows”,

Economic Journal, 90 (2):314–29.

Fischer, S., 1993, “The Role of Macroeconomic Factors in Growth”, Journal of Monetary

Economics, 32: 485-512

Harberger, A., 1978, “Perspectives on Capital and Technology in Less Developed Countries,”

in. M.J. Artis and A.R. Nobay, eds., Contemporary Economic Analysis, London: Croom

Helm

Lee, J-W and Kiseok Hong, 2010, “Economic Growth in Asia: Determinants and Prospects”.

ADB Economics Working Paper Series No. 220, Asian Development Bank, Manila.

Park, Donghyun and Jungsoo Park, 2010, “Drivers of Developing Asia’s Growth: Past and

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Shioji, Etsuro and Vu Tuan Khai, 2011, “Physical Capital Accumulation in Asia-12: Past

Trends and Future Projections”. ADB Economics Working Paper Series No. 240, AsianDevelopment Bank, Manila.




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Hangzhou 310012, P.R. China

Tel: (86-571) 8849-8000Fax: (86-571) 8735-7743

2nd Floor, Greenland Plaza

1 Zhongshan Road (North)

Nanjing 210008, P.R. China

Tel: (86-25) 8316-8988Fax: (86-25) 8316-8397

40th Floor, Teemtower

208 Tianhe Road

Guangzhou 510620, P.R. China

Tel: (86-20) 8396-3968Fax: (86-20) 8516-8198

Chengdu Binjiang Road (East) Branch Xiamen Lianyue Road Branch Qingdao Middle Hongkong Road Branch

1st & 16th Floors, Shangri-La Center

Block 9B, Binjiang Road (East)

Chengdu 610021, P.R. China

Tel: (86-28) 8612-8188

Fax: (86-28) 8444-7010

4th Floor, Office Building, Paragon Center

1 Lianyue Road, Siming District

Xiamen 361012, P.R. China

Tel: (86-592) 515-7000

Fax: (86-592) 511-5527

11th Floor, Shangri-La Center

Block 9, Hongkong Road (M), South District

Qingdao 266071, P.R. China

Tel: (86-532) 6670-6789

Fax: (86-532) 6887-7018

Wuhan Jiefang Road Branch Chongqing Honghu Road (West) Branch Changsha Chezhan Road (North) Branch

4th Floor, New World Centre Tower

634 Jiefang Road, Qiaokou District

Wuhan 430032, P.R. ChinaTel: (86-27) 8334-3099

Fax: (86-27) 8359-0535

1st & 10th Floors, Ourui Lanjue Center

Block 9, Honghu Road (W), New North District

Chongqing 401120, P.R. ChinaTel: (86-23) 6307-7088

Fax: (86-23) 6739-6636

3rd Floor, Annex Building, Securities Tower

459 Chezhan Road (North), Furong District

Changsha 410001, P.R. ChinaTel: (86-731) 8878-7088

Fax: (86-731) 8446-2455

Foshan Jihua 5th

Road Branch Tianjin Nanjing Road Branch Dalian Jinma Road Branch

12th Floor, Trend International Business Building

2 Jihua 5th Road, Chancheng District

Foshan 528000, P.R. China

Tel: (86-757) 8290-3588

Fax: (86-757) 8303-6299

10th Floor, Tianjin Global Trading Center

219 Nanjing Road, Heping District

Tianjin 300051, P.R. China

Tel: (86-22) 2317-6188

Fax: (86-22) 2321-5079

128B Jinma Road

Economic-Technological Development Area

Dalian 116000, P.R. China

Tel: (86-411) 8755-5088

Fax: (86-411) 8801-7568

is 2012 an end or a beginning - a story of china's economic cycle

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