China’s high national savings rate—one of the highest in the world—is at the heart of its external/internal imbalances. High savings finance elevated investment when held domestically, and lead to external imbalances when they flow abroad. Today, China’s higher savings, compared to the global average, mostly emanate from the household sector, due to demographic...
This book argues that China’s rapid industrialization since 1978 can be attributed to its rediscovery of the secret recipe of the original Industrial Revolution. The secret recipe is not based on institutional changes per se but rather the sequential creation of mass markets to support mass production. Market creation requires a strong state and appropriate industrial policies because mass markets are a public good that is extremely costly to create and can only be created through stages and under enormous political stability and social trust.
General Motors and Apple sold more cars and iPhones in China than in the US, but their sales were not counted as US exports to China, as these were made and sold in China. Policymakers should look at both trade and local sales by foreign firms (the FDI channel) to gauge bilateral economic balance. We estimate that US firms sold more goods and services to China than Chinese firms sold to the US in 2017, once the FDI channel is taken into account.
China’s digital economy has expanded rapidly in recent years, including both the emergence of new digital industries and the digitalization of traditional sectors. This brings significant opportunities but also potential risks. The blog discusses the pros and cons of digitalization and how the government can do better in maximizing the benefit while minimizing the risks.
To encourage innovation, the Chinese government gave tax incentives to firms whose R&D intensity (as measured by the ratio of R&D expenditures over total sales) exceeds a threshold that varies by their total sales. Using a major corporate tax reform in 2008, Professor Daniel Yi Xu from Duke University and his coauthors provide empirical evidence for some "strategic" behavior — including some relabeling of administrative expenditures as R&D — by the firms to take advantage of the tax incentives.