Growing like ChinaZheng SongFudan UniversityKjetil StoreslettenUniversity of Oslo and CEPRFabrizio ZilibottiUniversity of Zurich and CEPRFirst version: March 2008This version: December 2008AbstractChina has been growing at a high rate and has at the same time accumulated a stag-gering foreign surplus. We constructsa theory that explainthese seeminglypuzzlingob-servations, while being consistent with salient features of the Chinese growth experiencesince 1992: high output growth, sustained returns on capital investments, extensive real-location within the manufacturing sector, falling labor share and accumulation of a largeforeign surplus.The theory makes only minimal deviations from a neoclassical growthmodel. Its building blocks are …nancial imperfections and reallocation among …rms withheterogeneous productivity. Some …rms use more productive technologies than others, butlow-productivity …rms survive because of better access to credit markets. Due to the …-nancial imperfections, high-productivity …rms –which are run by entrepreneurs –must be…nancedout of internal savings. If these savings are su¢ ciently large, the high-productivitysector outgrows the low-productivity sector, and attracts an increasing employment share.During the transition, low wage growth sustains the return to capital. The downsizing ofthe …nancially integrated sector forces a growing share of domestic savings to be investedin foreign assets, generating a foreign surplus. We test some auxiliaryimplicationsof thetheory and …nd robust empirical support.JEL No .G18, O11, O16, O47, O53, P31.Keywords: China, Economic Growth, Entrepreneurs, Financial Market Imperfections,Foreign Surplus, Investment, Loans, Productivity Heterogeneity, Rate of Return on Capital,Realloca...
