Growing Like China

TLDR

The paper constructs a growth model that captures China’s transition, including high output growth, sustained capital returns, manufacturing sector reallocation, and a large trade surplus. The model posits that entrepreneurial firms adopt productive technologies but rely on internal savings because of financial frictions, while state‑owned firms persist with lower productivity due to superior credit access; high‑productivity firms grow faster when entrepreneurs save sufficiently, and the contraction of financially integrated firms redirects domestic savings abroad, creating a foreign surplus. When calibrated, the model quantitatively reproduces China’s economic transition. JEL codes: E21, E22, E23, F43, L60, O16, O53, P23, P24, P31.

Abstract

We construct a growth model consistent with China's economic transition: high output growth, sustained returns on capital, reallocation within the manufacturing sector, and a large trade surplus. Entrepreneurial firms use more productive technologies, but due to financial imperfections they must finance investments through internal savings. State-owned firms have low productivity but survive because of better access to credit markets. High-productivity firms outgrow low-productivity firms if entrepreneurs have sufficiently high savings. The downsizing of financially integrated firms forces domestic savings to be invested abroad, generating a foreign surplus. A calibrated version of the theory accounts quantitatively for China's economic transition. (JEL E21, E22, E23, F43, L60, O16, O53, P23, P24, P31).