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Determinants of Real Chinese GDP 1978–2014

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Abstract

In 2014, the IMF reported that China became the largest economy in the world according to Purchasing Power Parity rates. This study aims to explain the Chinese economic miracle. It focuses on frequently suggested factors influencing China’s real gross domestic product (GDP), such as export promotion, exchange rate policy, and foreign direct investment (FDI). The paper employs the Bounds test of the autoregressive distributed lag (ARDL) model to test for cointegration. Once cointegration is established, Granger Causality is investigated using the vector autoregressive model and the Toda and Yamamoto (1995) method. Two different combinations of the real macroeconomic variables exports, exchange rate, imports, and FDI were employed to examine Granger causal relationships. All explanatory variables, except for the exchange rate, were found to have plausible relationships with GDP. The exchange rate and GDP relationship was unexpected; a Renminbi appreciation was associated with an increase in GDP. To investigate this paradox, a third ARDL model was estimated with exports as the dependent variable and the exchange rate, world GDP, and FDI as the independent variables. In this model, we found evidence of cointegration and a plausible relationship between real exports and the real exchange rate. Exchange rate devaluation increased exports and thus indirectly increased GDP. Such findings help to resolve the unexpected results. Nonetheless, according to the Granger causality tests the established statistical evidence is rather weak. We found that both the exchange rate and FDI are no longer strong drivers of economic growth in China.

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Notes

  1. Rein Ming Bi (RMB) translates to “the People’s Currency.”

  2. The optimal lag length of each variable of the ARDL model is found by estimating: (p + 1)k regressions, where k is the number of right-hand variables in the estimated equation and p is the maximum number of lags included for each variable in the single equation ARDL model.

  3. For both Model A and Model B, data for imports and exports come from the China Statistical Yearbook (2015).

  4. The nominal GDP data are from the China Statistical Yearbook (2015), and the GDP deflator index is from the International Monetary Fund (2016) International Financial Statistics database.

  5. Data for the nominal exchange rate come from the Organization of Economic Cooperation and Development statistics (2015), the US GDP deflator comes from the Federal Reserve Economic Database (2016) of Saint Louis, and the Chinese GDP deflator comes from the World Bank (2016).

  6. The data for population in both Model A and Model B comes from Worldometers (2015).

  7. Data for FDI in real 2010 US dollars come from the World Bank (2016), and are transformed into real 2010 RMB by multiplying by the real ER. We employed the same ER used in Models A and B.

  8. The results of the unit root tests are included in Tables 1 through 4 of the online only supplemental appendix.

  9. The SIC is known to select fewer lagged differences than any of the other criteria, and as a result, it picks the most parsimonious model. This is desirable for this study, as the sizes of the two samples of Models A and B are relatively small.

  10. This is because all the variables in both models are expressed in terms of their natural logarithms.

  11. Although China has had a fixed exchange rate regime vis-à-vis the U.S. It almost always maintained a fluctuation band, thus It is appropriate to state that the exchange rate devalues or depreciates as both are possible under the Chinese foreign exchange regime.

  12. Within this period the nominal exchange rate appreciated by 17.5% whereas the real exchange rate by 15%.

  13. This was a big setback for policy stabilization purposes, because monetary policy constitutes a powerful tool to cope with shocks in the economy.

  14. The nominal world GDP in US dollars, and the nominal Chinese GDP in U.S. dollars, comes from the World Bank. The GDP deflator index used to transform World GDP into real 2010 U.S. dollars is from the IMF IFS database.

  15. The export data come from the China Statistical Yearbook. The FDI data come from the World Bank. The ER used in Model C is the same as defined in Models A and B.

  16. Unit roots for Model C are available in the only supplementary appendix.

  17. To save space we only report the long-run ECM ARDL model and accompanying cointegration equation.

  18. Toda and Yamamoto showed that even if a set of level variables are of different order of integration, the standard asymptotic theory is still valid, provided the order of integration does not exceed the lag length of the VAR model.

  19. This is the case because none of the probability values are below 0.05.

  20. The tests were carried out with the software EViews and are referred to as: “Granger Causality/Block Exogeneity tests.” in Eviews.

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Acknowledgements

We express our gratitude to Hunter Simons for excellent research assistance. We also thank Christopher Newport University and the chair of the Department of Economics, Dr. Robert Winder. Particularly we thank the Dean of Social Sciences, Dr. Robert Colvin, for his continuous support. Finally, we thank Dr. Roark Mulligan for his constructive criticism.

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Authors and Affiliations

  1. Department of Economics, Christopher Newport University, 1 Avenue of the Arts, Newport News, VA, 23606, USA

    George K. Zestos & Ryan Patnode

  2. Department of Economics, Harbin Finance University, Haping Liudao Street 6, Harbin, Heilongjiang, China

    Wei Guo

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  1. George K. Zestos
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  2. Wei Guo
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Correspondence to George K. Zestos.

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Zestos, G.K., Guo, W. & Patnode, R. Determinants of Real Chinese GDP 1978–2014. Atl Econ J 46, 161–177 (2018). https://doi.org/10.1007/s11293-018-9580-z

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