Financial Openness and the Chinese Growth Experience

If China’s current rate of growth continues, the size of its economy will ex-­ ceed that of the United States in only 12 years. Even if this projection is overly optimistic, China’s growth track record has been remarkable, as can be seen in figure 4.1. Our chapter reflects on the Chinese growth experi-­ ence from the perspective of an empirical multicountry model in the neo-­ classical tradition (see e.g., Barro 1997). That is, we link future growth to initial gross domestic product (GDP) per capita and a number of determi-­ nants of steady-­state GDP, such as population growth, life expectancy, fi-­ nancial development, and the quality of institutions. We devote special attention to international openness. An extensive literature has documented the positive effects of trade openness on economic growth. China has pro-­ gressively opened to trade and foreign direct investiment (FDI) (see Brans-­ tetter 2006 and Branstetter and Lardy 2006 for a detailed account of this process), and we attempt to quantify the role of trade openness in the Chi-­ nese growth experience. China has also opened its capital markets to for-­ eign investment, but this process is far from complete. Currently, a large debate is ongoing on the benefits of financial openness for growth (see, for instance, Prasad et al. 2003 for a summary article), which suggests that the growth effect is mixed. However, in this chapter we show, consistent with the results in Bekaert, Harvey, and Lundblad (2005) and Quinn and Toyoda (2003), that equity market openness and capital account openness are indeed associated with increased growth. Hence, China’s efforts to open its capital account may further enhance growth. Whatever the growth effect, many countries fear that opening their capital markets to foreign investors may have considerable costs in terms