This is the finding of a study conducted by Kai Guo and Papa N'Diaye on the topic 'Is China's Export-Oriented Growth Sustainable?'

However, the evidence collected in this working paper of the IMF suggest that it will prove difficult to accommodate such price reductions within existing profit margins or through productivity gains. Moving up the value-added chain, shifting the composition of exports, diversifying the export base, and increasing domestic value added of exports could give room to further export expansion.

Nevertheless, experiences from Asian economies that had similar export-oriented growth suggest there are limits to the global market share a country can occupy. Rebalancing growth toward private consumption would provide a large impetus to output growth and reduce the need for gaining further market share.

The paper said that sustainability can be achieved only through some combination of the three following channels: (1) larger increases in relative productivity in key export sectors to lower costs below that of competitors, (2) a further squeeze in profits, and (3) greater implicit or explicit subsidies through continued price
distortions. However, each of these strategies will prove increasingly difficult to realize.

It is mainly because productivity growth and the marginal return to investment have been slowing in recent years, signaling perhaps overinvestment in some key sectors of the economy, (particularly in manufacturing), as well as China's moving further up the production frontier.

Reducing profit margins in key export sectors provides some scope for expansion since profits are at relatively healthy levels. However, such margins would be exhausted well before the required expansion in market share could be achieved and in many industries in a matter of just a few years.

Further price distortions and subsidies to lower the cost of capital and make tradable sectors more competitive runs the risk of fueling more overinvestment in the manufacturing sector, of raising nonperforming loans, increasing trade tensions, and of ultimately lowering growth.

The task ahead could prove even more daunting as the recovery in demand from China's main trading partners may be far slower than that assumed under the WEO and could remain well below its pre-crisis levels. Slower import demand from those economies would naturally lower the feasible pace of China's export expansion. In such case, China's would have to gain even bigger shares in world markets.#