In the aftermath of the global financial crisis, China implemented the world’s largest stimulus package in late 2008. China was also the world’s first major economy to recover from the crisis. Following a brief but severe downturn in 2008, the Chinese economy recovered and expanded by 8.7% in 2009 and 10.4% in 2010.
Has China ever experienced a downturn?
BEIJING (Xinhua) The coronavirus pandemic has brought China’s spectacular, nearly half-century-long streak of growth to a stop, highlighting the monumental task that world leaders face in reviving the global economy.
Chinese officials announced on Friday that the world’s second-largest economy shrank 6.8% in the first three months of this year compared to the same period last year, putting an end to a run of unbroken growth that lasted through the Tiananmen Square crackdown, the SARS epidemic, and even the global financial crisis. The figures reflect China’s aggressive attempts to eradicate the coronavirus, which included closing most industries and offices in January and February as the outbreak afflicted tens of thousands of people.
The harsh figures demonstrate how difficult it will be to get the global economy back on its feet. China has become possibly the world’s single most vital economic engine, lifting fortunes at prior times of distress, such as the financial crisis, since emerging from abysmal poverty and isolation more than 40 years ago.
Now, China is attempting to relaunch its $14 trillion economy, a move that might provide a much-needed boost to the rest of the world. The spread of the coronavirus to the United States and Europe, which paralyzed their economies, has prompted predictions that global output will contract considerably more this year than it did even during the financial crisis.
Is the Chinese economy doomed by 2021?
China’s economy grew at an annual rate of 8.1 percent in 2021, but Beijing is under pressure to boost activity following a sharp downturn in the second half. 5:53 a.m., January 17, 2022
Is China in financial trouble?
Highlights from the story China’s national debt exceeds $5 trillion, accounting for more than half of its GDP. In the midst of the epidemic, a massive tsunami of debt has engulfed the planet, with borrowings spiraling out of control. The globe is staring at a massive debt mountain totaling $226 trillion.
How did China do during the Great Recession?
This article presents a brief overview of China’s growing prominence in the global economy and explores the global financial crisis’ spillover implications on China’s financial markets and macroeconomy. Alternative methods of estimating these effects are presented and critiqued. China, contrary to common belief, was hit particularly hard by the global recession brought on by the financial crisis. It experienced a significant reduction in exports, which were only partially offset by China’s massive stimulus package. While growth was still substantially above international standards, it fell by the same amount as the United States. The report concludes with a brief assessment of some of China’s major obstacles in rebalancing its economy to maintain high growth.
How did China weather the financial crisis of 2008?
In 2007, China’s export to GDP ratio was 35%. Exports decreased by 2.2 percent in November, compared to a 25% increase in September. This drop in exports may have slowed GDP growth by 3%. If the indirect effects are taken into account, China’s 2008 growth rate could have been reduced by more than 5%.
China’s export promotion policy has resulted in a high level of export dependency. However, from a macroeconomic standpoint, China’s high export dependency might be attributed in part to overcapacity produced by excessive investment. Fixed asset investment (FAI) and net exports combined to account for more than 60% of GDP growth in 2007. The engine of Chinese growth is FAI and exports.
Significantly, FAI growth has typically outpaced GDP growth. Since 2001, this has resulted in increased investment rates. In this unsettled context, how is China’s growth drama playing out?
Because FAI is higher than the other components of aggregate demand, the potential growth rate increases. As a result of the excess demand (overheating), overcapacity will emerge. Because the growth rate of FAI is larger than the growth rate of other components of aggregate demand in China, sustainable growth is impossible.
Overcapacity can only be absorbed by a further increase in the growth rate of FAI if the growth rates of other components of aggregate demand do not rise. This feedback loop causes FAI to speed up in order to absorb overcapacity.
The rate of FAI expansion will eventually reach a limit set by social, environmental, natural resource, ecological, or other limits. The growth process will then break down due to deflation.
To avoid the growth process from collapsing, either FAI growth can be reduced or the growth of the other aggregate demand components can be boosted. The equalization of FAI growth rates with other components of aggregate demand is a necessary and sufficient prerequisite for long-term stability and sustainability.
In 2004, when signs of overcapacity began to emerge, the government attempted to stifle fresh investment projects. A good example is the steel business. China produced almost 400 million tons of steel in 2004. Concerned about overcapacity, the government halted new steel mill building. However, robust steel demand, owing to real estate expansion and strong export demand, meant that new steel factories continued to pop up. In 2007, China produced more than 600 million tons of steel.
Temporarily, growth was maintained, but at the expense of economic equilibrium. From mid-2007, China’s inflation rate accelerated due to investment frenzy and high external demand. For many years, the robust foreign demand postponed the emergence of overcapacity.
However, export demand is exceedingly volatile. The global financial crisis caused export demand to plummet in the second half of 2008. Overcapacity that had been dormant for a long time suddenly erupted. In September and October 2008, the abrupt turn from inflation to deflation was quite striking.
Overcapacity and the need for adjustment were unavoidable, whether or not the GFC occurred. The global economic crisis only exposed China’s growth pattern’s weakness in a dramatic way.
Following the Great Recession, the Chinese government responded fast with a stimulus package and monetary expansion to counteract decreasing GDP growth.
The government announced a 4 trillion Yuan stimulus program (14 percent of 2008 GDP) for 2009 and 2010 in November 2008.
China’s stimulus package’s success is unsurprising. China’s budget deficit has been so low during the last decade that its debt should only be around 20% of GDP after the stimulus. The Chinese government has plenty of room to deploy expansionary fiscal policy to compensate for the lack of export demand.
One-quarter of the 4 trillion yuan plan is being funded by the central government through direct grants and interest rate subsidies. Bank credit is the stimulus package’s second most important source of funding.
Local governments offered 18 trillion yuan stimulus packages of their own. The central government would issue government bonds worth 200 billion yuan on behalf of local governments, but commercial bank credit is projected to be the most important source of funding for the proposed local-government projects.
Since 2009, China’s recovery has been aided by monetary expansion. To complement the expansionary fiscal policy, the People’s Bank of China (PBOC) has implemented a very expansionary monetary policy. Bank credit surged by 7.3 trillion RMB in the first half of 2009, already above the annual objective.
As a result, liquidity has been flooded into the interbank money market. This resulted in the phenomenon known as “flour being more expensive than bread,” with interbank interest rates being lower than interest rates on commercial bank deposits.
When the Western banking system was on the verge of collapse, China’s banking system was comparatively safe. As a result, an increase in bank credit and wide money has resulted from increased liquidity in the interbank money market. What are the long-term consequences of these two GFC responses?
Although expansionary fiscal and monetary policies have succeeded in stopping a decline in growth, their medium and long-term consequences are a source of concern.
First and foremost, China’s economic style is characterized by investment overdrive. As a result of the stimulus package, the investment rate has risen from 25% in 2001 to 50% today. As a result, China’s overcapacity is likely to worsen in the future.
Second, as a result of the stimulus package, investment efficiency has decreased. Overcapacity has been a problem for the economy for some time, and the government is aware of it. As a result, rather than new manufacturing, the stimulus package focused on infrastructure. However, there are still issues with a stimulus package focused on infrastructure. Investment efficiency declines will have a significant detrimental impact on China’s long-term growth.
Third, infrastructure investment is a long-term commitment with no immediate payoff. Investment in manufacturing capacity is also required. If there is no traffic on an eight-lane motorway, where will tolls come from? In addition, waste in infrastructure construction is rampant as a result of rapid implementation.
Fourth, local governments’ over enthusiasm for local investment may cause major problems. Commercial loans guaranteed by local governments will fund the majority of local stimulus initiatives. Local governments in China have an insatiable hunger for extravagant investment projects and sub-optimal resource allocation as a result of institutional frameworks.
Finally, as previously said, China’s monetary policy has been excessively loose. Such low interest rates are unnecessary. In underdeveloped countries, interest rates are an important screening tool. Small and middle-sized private and creative businesses face prejudice in comparison to state-owned monopolistic businesses since borrowing rates are so low. It’s possible that the progress made in enterprise reform will be undone.
To summarize, if the government fails to address fundamental issues head on, the crisis-management tactics may have major negative consequences. However, it is worth noting that the Chinese government is aware of the issues and has begun to take steps to reintroduce structural adjustment to the table.
Hopefully, the Chinese government will be successful in both restoring the economy and correcting the deteriorating structural problem. Only then can China’s future growth have a solid base.
Yu Yongding is a professor at the Chinese Academy of Social Sciences and the former director of the Institute of World Economics and Politics (CASS). This article is an excerpt from his Richard Snape Lecture, which he gave to the Australian Productivity Commission last November in Melbourne.
Will China catch up to us?
According to the British consultancy Centre for Economics and Business Research (CEBR), China’s GDP would rise at 5.7 percent per year until 2025, then 4.7 percent per year until 2030. China, now the world’s second-biggest economy, is expected to overtake the United States as the world’s largest economy by 2030, according to the report.
When did China’s economy first open up?
GDP growth has averaged about 10% per year since 1978, when China began to open up and reform its economy, and more than 800 million people have been pulled out of poverty. Over the same time span, there have been tremendous gains in access to health, education, and other services.
China has risen to the status of an upper-middle-income country.
Going forward, it will be critical that poverty alleviation initiatives progressively focus on the vulnerabilities faced by the significant number of individuals still considered poor by middle-income country criteria, including those residing in cities.
China’s rapid growth, which has been fueled by resource-intensive manufacturing, exports, and low-wage labor, has mostly reached its limitations, resulting in economic, social, and environmental imbalances. To address these inequities, the economy’s structure must transition from low-end manufacturing to higher-end manufacturing and services, as well as from investment to consumption.
In the face of structural restrictions such as decreased labor force growth, reduced returns on investment, and slowing productivity, growth has slowed in recent years. The task now is to discover new growth drivers while also dealing with the social and environmental consequences of China’s prior development path.
China’s rapid economic expansion has outpaced institutional development, and there are significant institutional and reform gaps that must be addressed in order for China to maintain a high-quality and long-term growth path. To further support the market system, the state’s role must evolve and focus on delivering stable market expectations and a clear and fair business climate, as well as strengthening the regulatory system and the rule of law.
Because of its size, China is at the center of major regional and global development challenges. China is the world’s greatest emitter of greenhouse gases, with per capita emissions currently surpassing those of the European Union, although being slightly lower than the OECD average and far lower than the United States, and its air and water pollution has an impact on neighboring countries. Without China’s participation, global environmental issues will remain unsolvable. Furthermore, maintaining adequate economic growth has substantial spillover effects on the rest of the international economy.
Many of China’s difficult development challenges, such as transitioning to a new growth model, increasing aging, developing a cost-effective health system, and promoting a lower-carbon energy route, are applicable to other countries. Through trade, investment, and ideas, China is exerting a rising effect on other developing countries.
Following 2.3 percent real GDP growth in 2020, China’s economy is expected to increase by 8.5 percent in 2021, mainly to base effects. The pace of growth is decreasing, owing to the lingering effects of policy and macroprudential tightening, as well as floods and the latest Delta epidemic. Although lingering stricter restrictions and cautious sentiment as a result of the recent Delta outbreaks would weigh on consumption recovery, their impact is projected to be mainly compensated in the second half of the year by robust foreign demand and moderate policy support. The near-term risks have shifted to the downside, with the main concern being recurrent outbreaks caused by more transmissible COVID-19 mutations, which might cause major economic upheaval. Given unfavourable demographics, sluggish productivity growth, and the legacies of excessive borrowing and pollution, China’s economy faces structural challenges in the medium term. Short-term macroeconomic policies and structural reforms aiming at reinvigorating the shift to more balanced, high-quality growth are needed to address these difficulties.
The administration recently emphasized promoting common prosperity as a fundamental economic goal, indicating a likely shift in policy objectives toward addressing income disparity. Over the medium run, policies aimed at reducing high inequality through more equitable taxes and a reinforced social security system will result in long-term poverty reduction, a greater middle class, and increased private consumption as an economic driver.
When did China surpass the United States as the world’s second-largest economy?
In 2010, China overtook Japan to overtake the United States as the world’s second-largest economy in terms of GDP expressed in current dollar values. The United States continues to lead by a significant margin. The US GDP was 2.5 times bigger than China’s in the same year. It’s worth noting, though, that Japan’s per capita GDP was still ten times higher than China’s. Second place was just one of a slew of Chinese victories. For example, in 2009, China surpassed the United States as the world’s largest automotive market, and in the same year, it surpassed Germany as the world’s leading exporter. China has the highest foreign-currency reserves in the world (estimated at close to USD 4,000 billion in early 2014). According to IMF projections from 2014, China’s GDP, measured in purchasing power parity (PPP) rather than dollars, outpaced that of the United States. It should be mentioned that the PPP exchange rate calculates the number of dollars required to buy the same amount of goods and services as if the country’s currency unit were used. PPP-expressed GDP is a complicated and sometimes contentious computation, but it eliminates pricing discrepancies between countries, allowing for a more accurate comparison of nations’ real wealth.
Is China wealthier than the United States?
In both nominal and PPP terms, the United States and China are the world’s two largest economies. The United States leads in nominal terms, while China has led in PPP terms since 2017, when it overtook the United States. In nominal and PPP terms, both countries account for 41.89 percent and 34.75 percent of global GDP in 2021, respectively. Both countries have much bigger GDPs than the third-placed countries, Japan (nominal) and India (PPP). As a result, only these two are competing for first place.
According to IMF forecasts for 2021, the United States will be ahead by $6,033 billion, or 1.36 times, in terms of exchange rates. On a purchasing power parity measure, China’s GDP is worth $3,982 billion dollars, or 1.18 times that of the United States. According to World Bank estimates, China’s GDP was approximately 11% of that of the United States in 1960, but is now 67 percent in 2019.
Due to China’s enormous population, which is more than four times that of the United States, the gap in per capita income between the two countries is enormous. In nominal and PPP terms, the United States’ per capita income is 5.78 and 3.61 times that of China, respectively. The United States is the world’s fifth richest country, while China is ranked 63rd. On a PPP basis, the United States ranks eighth, while China ranks 76th.
China’s GDP growth rate reaches a high of 19.30 percent in 1970 and a low of -27.27 percent in 1961. Between 1961 and 2019, China experienced a 22-year growth rate of greater than 10%. In 1984, the US hit an all-time high of 7.24 percent, while in 2009, it hit a new low of -2.54 percent. For the first time in eight years, the United States’ GDP growth rate was negative. In the last four years, China has experienced negative growth.
China is ahead of the United States in the agriculture and industry sectors, according to the World Factbook. Agriculture output in the United States is only 17.58 percent of China’s, whereas industry output is 77.58 percent. The US services industry is more than double that of China.