Imagine Chinese growth rates without misallocations

China has been growing at a very rapid pace, and many have studied how this has happened and why. Yet, when you look at the economy now, it is still remarkably inefficient, especially with a financial sector that is very far from potential. In particular, the state-controlled banks do not provide loans for the best investment opportunities, but rather disproportionately to state-owned enterprises, which obviously are not as productive as the private sector.

Robert Cull, Wei Li, Bo Sun and Lixin Colin Xu use a survey of manufacturing firms that the World Bank conducted in China in 2005 to document what determines the firm;s financial constraints. To no one's surprise, state-owned enterprises have a big advantage. But among them, those who have CEOs that are well connected with the government or the Party have is even markedly easier. This points of course to the massive misallocations within China that people are still complaining about. Imagine how much richer China could be with a better allocation of its financial resources.

But of course, one can argue that China is growing like crazy because it is transitioning from even worse misallocations, where there weren't even private savings to sustain a more productive manufacturing sector. This argument has been made, among others, by Zheng Song, Kjetil Storesletten and Fabrizio Zilibotti. Not only is China growing through rapid investment in more productive technologies, it is doing so while getting more efficient in distributing financing. And seeing how inefficient it is, there is a lot of potential growth for many more years.