Why has China grown during the economic crisis?

18 Feb

China have unquestionably become a major player in the financial world in the past few decades as a result of their cheap labour, high workforce and frequent government legislation that puts in place schemes to encourage foreign direct investment. Its banking sector alone has more than doubled from $10 trillion in the beginning of 2008, to somewhere in the region of $25 trillion in 2014 (Peston, 2014) and these trends are no accident.

Similarly to the United States, China is in huge debt that it is unlikely to realistically fully pay back. This is a result of the consistent borrowing and spending schemes put in place by the Chinese government that, although do admittedly directly contribute to economic growth, come at a price. Since the economic reform in 1978 in which China enforced its ‘open door’ policy, urbanisation has increased from 22% in 1983 to 33% in 1999 and there have been an additional 24 cities now classified as megacities (Cheng and Masser, 2003). Yet, China suffered majorly due to the worldwide financial crisis in 2008 and its factories seemingly closed overnight when spending halted. This is illustrated by that before the economic crisis, investment in the Chinese economy was roughly 40% of gross domestic product (GDP), around three times as much as other developed countries. However, this investment actually increased to 50% after the economic crisis, which is very uncommon. This is a result of a monumental investment by the Chinese government directly into infrastructure around the country, and an example of such investment is the pumping of over £200 billion into the city of Wuhan alone. 

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The city of Wuhan is known predominantly as being the site of 72 year-old Chairman Mao’s swim across the Yangtze River during Wuhan’s 11th annual Cross-Yangtze competition, on July 16th 1966. Though heavily guarded and surrounded by portraits of himself in the water, Chairman Mao swam this race in order to demonstrate his ability to still be a vigorous leader and to emphasise to the Chinese population he is the one to take them forward (Strong and Keyssar, 1985). The city of Wuhan has already a population of over 10 million people and if the current rate of infrastructure building continues, it is likely to challenge Shanghai for the title of the second biggest city in China. The central business district of the town is being demolished for the building of a £3 billion skyscraper that will surpass double the height of The Shard, London. As a whole, China has built over 30 new airports, constructed 10s of new metros in already thriving cities and dramatically increased the length of both high speed railway lines and motorways across the country. This ‘never seen before’ spending plan has been put in place by the Chinese government and will undoubtedly bring the economic growth rate back up to levels before the financial crisis which will result in an increased number of jobs and generally greatly benefit the country. However, the economy and the Chinese government alike cannot expect to see a return of anywhere near the amount of income that has been injected into it purely because of the sheer scale of the capital. Therefore, this will only lead to increased debt and may well have have far reaching negative impacts in the future. The investment that has taken place can fundamentally be described as ‘toxic’ in an economic sense due to the increase in debts the Chinese government has had to absorb in order to gather funds to return its economy to its pre-crisis state. The country’s debts have been rising at a rate of 15% per annum and this is totally unsustainable for a country that is swiftly becoming one of the economic superpowers of the modern world. These statistics present a worrying future for the economy of China and the recent small negative events that have occurred in the Chinese market over the past 12 months could foreshadow something far more serious.

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This unsustainable growth can result in one of two outcomes occurring. The first would involve a controlled reconstruction of the economy and although this would take a considerable amount of time, a disaster would be prevented. The second, taking place amongst a continued high lending rate, would end in a major economic crisis that will affect the whole world due to the role China plays in the world market (Peston, 2014). Admittedly, the government of China have put in place economic reforms designed to combat this impending doom and Charles Liu, a successful Chinese investor, believes that although China’s growth rate will fall, it is possible to lessen the consequences if careful, and possibly unpopular, measures are put in place (Peston, 2014). Yet, these economic reforms are still very young and not only will the positive effects of these not be felt for many years, but it is impossible to know if they will in fact be successful at all.

The potential collapse, or at least slowing, of the Chinese economy would have negative consequences for its people by lowering living standards and increasing the unemployment rate. Yet, this possibility would still have some positive impacts on Western economies, such as ours, by removing some of the power China has. This increase in Western power could be used positively in ways such as lobbying to reduce the impacts of climate change through forcing major polluters, such as China, to either introduce more environmentally friendly methods or shut down entirely some of its factories. Nevertheless, the negatives categorically outweigh the positives due to the impact the failing economy would have on the people of China. This is most likely to be present by increasing polarisation, as is always common when a disaster strikes, by making the rich richer and the poor poorer.  

By Joss Woodhead

 

 

http://www.bbc.co.uk/news/business-26225205

References:

–       Cheng, J., and Masser, I., 2003, Urban growth pattern modeling: a case study of Wuhan city, PR China. Landscape and urban planning: 62(4), 199-217.

–       Peston, R., 2014, Will China shake the world again?, BBC News, http://www.bbc.co.uk/news/business-26225205, Accessed 18th February 2014.

–       Strong, T. B., and Keyssar, H., 1985, Anna Louise Strong: Three Interviews with Chairman Mao Zedong. The China Quarterly: 103, 489-509.

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2 Responses to “Why has China grown during the economic crisis?”

  1. squouse February 19, 2014 at 5:22 pm #

    Robert Peston is great. There’s more on Wuhan’s unsustainable levels of growth and development in his documentary that was on on Tuesday evening, and the impact the Western recession had on China. I think the rapid urban growth isn’t benefitting the average Chinese though; particularly with housing – there are huge amounts of expensive apartment blocks left empty, and economic instability means people invest in an extra apartment rather than in a savings account.

    http://www.bbc.co.uk/iplayer/episode/b03w7gxt/This_World_How_China_Fooled_the_World_with_Robert_Peston/

    6 days left to watch it on iPlayer

    • jw8g12 February 19, 2014 at 9:39 pm #

      Hi there, thanks very much for your comment. I actually saw that documentary was going to be on as there was a link to it on the BBC article that Peston wrote but I didn’t manage to watch it so I’ll definitely watch it now. I agree with you that the urbanisation probably isn’t benefiting the average person in China. However, it is still an essential process that needs to take place if living standards are to be raised which I would imagine is a major aim of the Chinese government. Thanks again!

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