Rags to Riches and Back: The Story of Chinese Boom and Bust

The 1970’s

The story of China’s growth began in the 1970’s. Back then China was an extremely poor country with one of the lowest per capita income in the world. The population of the country was largely agrarian. The output of food grains was so small that starving to death was a possibility in China. Over time, the Chinese government realized that at least partial privatization was necessary if some economic progress had to be achieved. A unique combination of state driven infrastructure and private enterprise propelled China into the realm of rapidly developing nations.

Growth at an Astonishing Pace

Right from the 1980’s, the Chinese growth story had gained substantial momentum. State investments in infrastructure primarily drove the growth. The growth in infrastructure led to growth in private enterprise. China grew at an astonishing rate of 10% for 35 long years. This means that in 35 years, the economic output of the nation increased by 3200% in 35 years! The Chinese growth story was driven by the relentless initiative of the government to drive in growth. It soon became known as the Chinese miracle which was a synonym for hope, faith, and progress amongst the impoverished nations of the world.

Driven by Savings and investments

The Chinese miracle was largely driven by savings and investment. The rates of investment in China were unheard of! China routinely invested 50% of its GDP back into capital goods. This made progress even faster. China today has the best infrastructure in the world, and as a result, the cost of manufacturing is the lowest.

However, China’s massive investments also became the reason for economic problems later. If you invest so much money in a very little time, you are bound to make mistakes. The excessive investments that were earlier catalyzing China’s growth later lead to mal-investments.

Let’s understand this in detail in the forthcoming points:

Changing Investment Landscape

The landscape of Chinese investments also changed rapidly along with the growth in the economy. The state driven economic structure of Chinese economy was favorable to the large scale infrastructure growth that was earlier driving China’s growth. China has already picked those low hanging fruits. Any investment in infrastructure that could have possibly happened has already occurred. The Chinese economy now needs more complex investments in innovative technology. Such investments cannot be state driven since there are fixed objectives at hand. Instead, the complex investments are run by trial and error, and the free market provides the final verdict of success or failure. The Chinese state machinery is used to lightning-fast execution with predefined goals. This trial and error process is a new skill that should have been given the due time. Driven by an insatiable desire for growth, China bit of more than it could chew.

At first, all investments made money. When the economy is growing at 10%, it is almost impossible to lose money. This further fed into the feedback loop encouraging Chinese corporations to take up horrendous amounts of debt. Easy success made the market lose discipline. All the forecasts were extremely optimistic, and everyone seemed to be making money until one day they weren’t!

Post-2008 Recession

During the period after the 2009 recession, the Chinese investment rates dropped. The world thought China would go into a slowdown. However, the Chinese government thought otherwise. In order to keep China out of the recession, infrastructure projects were still undertaken, this time with massive amounts of debt. Soon China’s debt binge became known to the world. Everyone started doubting the credibility of the state numbers that report economic data and also became wary of the horrendous amounts of debt China had undertaken.

The problem with high debt and malinvestment is that it created several asset bubbles at once. The inflow of easy money led to a stock market bubble as well as a Realty bubble. The stock market bubble crashed, however, the property bubble is still at large. Cities have been overbuilt, and there are no takers for these homes. However, the prices still refuse to budge. Most of these industries and corporations are supported by the artificially cheap credit provided by Chinese banks. Some of them even have political patronage and survive despite making losses.

The biggest problem with the spending binge has been the creation of excess capacity in manufacturing. It was manufacturing that took China to the top, and it is manufacturing that is capable of driving it back to the ground. Excess capacity means excess competition. This would drive prices lower further exacerbating the deflationary trend that China has been seeking to avoid for so long.

Living in Fear

The Chinese people are now living in fear, a fear that there might not be an economic recovery this time. There is also fear that capital may flee the country given the large economic problems that it is facing. This is the reason why the government doesn’t allow complete convertibility of the Renminbi. People are also living in fear that massive unemployment is just around the corner and the state of starvation that China fled from in the 1970’s may very soon be back.


❮   Previous  Article Next  Article   ❯

Similar Articles Under - Globalization

View All Articles


Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Globalization