Is the People's Republic of China's current slowdown a cyclical downturn or a long-term trend? A productivity-based analysis

Whether the People's Republic of China's (PRC) economic slowdown since the 2008 financial crisis is a cyclical downturn or a long-run trend has important policy implications. As productivity is the determinant factor for long-term economic growth and the PRC watches soaring labor cost while no serious unemployment recently, this article tries to understand its slowdown from the supply side. Based on provincial panel data, it first identifies the determinants of productivity growth and then uses counterfactual analysis to simulate effects of the PRC's policy-induced investment boom on its economic growth. It finds that economic openness enhances productivity, whereas economies at higher stages of development on average have lower productivity growth. Second, productivity of economies accumulating more stock of inventory grows more slowly, while the opposite is observed for those with higher labor involvement rates. Third, government size and investment rate both have significantly negative effects on productivity growth. Finally, the diminishing late-mover advantage and the growth in investment rate are both major contributors to the current decline in the PRC's productivity growth. The current economic slowdown does not seem to be a cyclical downturn. Indeed, further reforms are needed to stabilize the PRC's growth.