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Authors:

• Zheng Michael SONG
  Chinese University of Hong Kong

• Fabrizio Zilibotti
  University of Zurich and CEPR

• Kjetil Storesletten
  Federal Reserve Bank of Minneapolis and CEPR

This paper constructs a growth model that is consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The building blocks of the theory are asymmetric financial imperfections and heterogeneous productivity. Some firms use more productive technologies, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms – which are run by entrepreneurs – must be financed out of internal savings. If these savings are sufficiently large, the high-productivity firms outgrow the low-productivity firms and attract an increasing employment share. The downsizing of the financially integrated firms forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. A calibrated version of the theory can account quantitatively for China's growth experience during 1992-2007.