Wealth Accumulation and the Historical Gene of China's Economic Prosperity

Author: GAO Zhanjun ZHANG Xiaojing

At a roundtable discussion organized by China Forex，GAO Zhanjun，the Executive Editor-in-Chief of China Forex，ZHANG Xiaojing，director of the Institute of Finance and Banking at Chinese Academy of Social Sciences (CASS) shared their views on the historical genes behind China's economic boom from the perspective of wealth accumulation. The conversation，which follows in edited form，was moderated by GAO Zhanjun.

Discussion 1

The origin of the compilation of China's national balance sheet

GAO Zhanjun: The Decision on Major Issues Concerning Comprehensively Deepening Reforms was adopted at the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee on November 12，2013，which clearly put forward the strategic task of “compiling national and local balance sheets”. It is rare in today's world to promote the research and preparation of national balance sheets at the highest level of the country. What might be your take on the reasons for this?

ZHANG Xiaojing: Every household needs to keep accounts，and so does the country. The national balance sheet (NBS) is the country’s account book. After the 2008 international financial crisis，all major countries in the world have accelerated their research on balance sheets，and China is no exception. Compared with flow data，such as GDP，the NBS can list the assets of the entire country and reveal the correspondence among the main economic activities of various economic entities. This framework not only helps us accurately "diagnose” the health of a country's economy (such as local government debt problems) and better understand the source and intensity of possible shocks，but it also provides a basis for governments to understand their capacity and policy space to deal with financial turbulence or crisis. Therefore，in a sense，the NBS is not only an account book，but also a “medical report”.

Discussion 2

Compilation of China's national balance sheet: progress and implications

GAO Zhanjun: A team headed by Professor LI Yang and yourself has spent 10 years to complete the compilation of China's national balance sheet for the last 20 years(2000-2019)，and it has become an authoritative basis for analyzing and judging China's national capabilities，wealth composition and debt risks，and has established an international voice in this field.

How could you elaborate the explanatory power of China's economic development on the basis of the above work? I mean how has the national capacity evolved? What do the changes in the scale and structure of China's assets and liabilities reveal?

ZHANG Xiaojing: In terms of state capacity，wealth accumulation itself is a reflection of capacity. According to the statistics，China's wealth stock has risen from less than 39 trillion yuan in 2000 to 675.5 trillion yuan in 2019，with a compound annual growth rate of 16.2% (the CAGR of China's nominal GDP in the same period was about 12.8%). In other words，it means our country became richer and more risk resistant.

More interestingly，China’s catch-up in wealth came later than its catch-up in income/output terms. In the first decade of the new century，the ratio of China’s GDP to that of the US was higher than the ratio of China’s national wealth to that of the US. The turning point was reached in the global financial crisis，during which US households’ wealth suffered greater losses than their Chinese counterparts. It should be stressed，however，that China’s wealth catch-up with the United States and other advanced economies has been driven not only by rapid economic growth and high savings，but also by a revaluation effect (for example the rise of housing price and the appreciation of RMB).

In addition，we are also concerned about the structural changes of assets and liabilities: the first is the distribution of wealth. In the first two decades of the 21st century，the wealth of the Chinese household sector accounts for the proportion of the whole society's wealth was about 75-80%，and the government sector reached up to about 20%-25% respectively. The net assets of the Chinese government are much higher than those of major developed economies，which shows that China has always had a stronger ability to deal with the potential crisis; the second is financial risk. From the perspective of macro leverage ratio，from 2008 to 2016，China's leverage ratio rose rapidly，and financial risks gradually increased. However，due to the actual effect of "deleveraging" in recent years，the leverage ratio has shown a trend of declining and stabilizing，and the overall financial risk has eased. Due to the impact of Covid-19，the macro leverage ratio has risen rapidly in the recent years.

Discussion 3

The latest groundbreaking research: revealing the evolution of wealth in traditional China

GAO Zhanjun: Although research on China's national balance sheet has made great progress，so far the balance sheet before 2000 has not been compiled. Major European and American countries have not only compiled national balance sheets from the early 20th century to the present，but some studies have pushed the compilation to the 18th century or even earlier. Could you please let us know why the research on China falls far behind?

ZHANG Xiaojing: There may be two main reasons: First，the richness of historical data. The early historical data of European countries are relatively abundant. At the micro level，there are a lot of parish census，heritage registration and other data sources in Northwestern European countries，such as England and the Netherlands. At the macro level，borrowing the concept of Ray Huang，the European government also pays more attention to mathematical management. In the 16th and 17th centuries，for example，Britain and France already had the embryonic form of national accounts. On the contrast，the historical data of traditional China is not so rich，and it is more difficult to mine and collate.

Second，our quantitative research started late. In fact，quantitative historical research in China only started 20 years ago，decades later than that of developed countries in Europe and the United States. For example，D. North and R. Fogel who won Nobel laureates in economics for their quantitative economic history studies did most of their work in the 1970s. Of course，China's research on historical data now is in a very vigorous stage，especially the historical GDP research has achieved remarkable results.

GAO Zhanjun: Based on the System Of Nat