Is China’s Economic Miracle Coming to an End?

8 Mar

In 2008, while the Western world was economically collapsing, China was driving a £400 billion stimulus, building on a scale that hasn’t been seen since Egypt’s Pharaohs (Peston, 2014). China continued to grow at around 10% per annum, while western countries were in recessions. It was unthinkable what China were able to achieve during the financial crisis; building a new skyscraper every five days, over thirty new airports, metros in twenty-five cities and the three longest bridges in the world. This investment splurge however was financed with trillions of pounds of debt. At the beginning of the financial crisis, China’s banking sector was worth $10 trillion, today it is worth $24 trillion. This $14 trillion increase took China around six years to build, while the US commercial banking sector is worth that increase – and that took over a century to generate (Peston, 2014). Whilst most people were aware of a large credit boom developing in China, not many were aware of the huge scale it was taking.


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China’s growth had already been accelerating before the financial crisis; the difference is growth was fuelled by other means than debt. Economic reform was introduced with the idea of gradualism, meaning creating economic growth with minimal disruption to society. First real economic reforms were introduced in 1978 by Deng Xiaoping in the form of experiments where government and enterprise were separated to curb soft budget constraints. During periodization there was a focus on increasing competition in markets, increasing entry of non-state firms as well as improvements in efficiency of already state-owned firms. Economic growth also grew faster as a result of the open door policy on the Chinese economy which cumulated when China decided to join the World Trade Organisation in 2001, meaning vast increases in foreign trade and foreign direct investment. By 2009, China had become second in the world for attracting inward foreign direct investment flows, with 153 billion US dollars’ worth of investment (UNCTAD, 2011, p4).

Although China’s banking sector had little exposure to the assets that were taking down the Western world, there was anticipation of a slowdown in China’s largest contributor to economic growth – exports. Europe and the US are China’s largest export markets, and with the crisis being at the heart of these economies, China was always going to eventually suffer in some form. In 2008 the Chinese government implemented a monetary tightening policy, creating a successful property boom in order to help consequences of exports (Lardy, 2012, p6). However alone this would not be enough to sustain economic growth at what it was, creating what would be one of the largest investment periods of China’s history but also the largest debt deficit.

Debt cannot keep increasing faster than GDP forever however, and when this comes to an end, some think China could be hit by a sharp economic slowdown in 2014. There are also questions over how this potential economic slowdown would affect the rest of the world. Optimistic economists in China believe that they can grow out of this problem and the Chinese government have put in place economic reforms, in order to rebalance the economy so growth no longer is driven by debt fuelled investment but by consumption of the native population (Peston, 2014). However growing out of the problem is not mathematically possible when credit is twice the size of the economy and is growing twice as fast too. This has been causing recent tension and worry in the Chinese financial markets as to whether they are stable enough. Potential has been seen as to whether China is going to become the “third wave” of the global economic crisis following US’s Wall Street crisis and Europe’s Eurozone crisis. Bank lending would need to decrease to help the debt and credit issue, however in January bank lending grew to its fastest rate in four years which came as a surprise to many (Kaletsky, 2014). This goes against the announcement that China is trying to move away from a debt fuelled economy.

Debt-fuelled investment is not China’s only concern regarding an economic slowdown this year as China’s exports unexpectedly tumbled in February turning the trade balance into a deficit (Rose et al, 2014). Trade was expected to increase for China this year as its largest exporting markets are starting to recover from recessions. However, China believe they are still going to reach their target of 7.5% trade growth for 2014 and that the manufacturing sector is just going through a short term dip. Though whether this target will be reached is still unclear.

If China did become the “third wave” then how would it affect the rest of the world? China in recent years has had the largest trade surplus in the world, and by selling material goods cheaper and cheaper to the Western world, this increases the standard of living in these countries as they can afford to buy more. If China is hit by a recession then export prices are likely to rise which would have a global effect especially due to China’s power in trade, not only in the Western world but also in Africa and Asia too. Deficits in the second largest economy of the world can too translate into deficits into other large economies. On the other hand China has also destroyed many exporting companies in countries elsewhere, and trade balances could actually benefit from China falling so it wouldn’t necessarily be all bad news globally.

Whether China’s economic dominance is coming to an end remains to be seen. Theory and maths says it will, yet facts and figures continue to see China grow. Even if growth declined to a sustainable level but not a negative one, then there are also fears that this would not satisfy the Chinese, especially the rich’s hunger for power and higher living standards. There remains doubt over how long China’s economic power can go on for, but at least for now, China is still an economic force to be reckoned with.




Kaletsky, A. (2014). When China’s Economic Priorities Clash.  New York Times. [online]. Available at: [Last accessed 8th March 2014.]

Lardy, N R. (2012). Sustaining China’s Economic Growth After the Global Financial Crisis. USA: Peterson Institute for International Economics. pp5-11.

Peston, R. (2014). Will China Shake the World Again? BBC News. [online]. Available at: [Last accessed 8th March 2014.]

Rose, A and Yao, K. (2014). China February exports tumble unexpectedly. Reuters. [online]. Available at: [Last accessed 8th March 2014.]

United Nations Conference on Trade and Development (UNCTAD). (2011). World Investment Report. Non- Equity Modes of International Production and Development. United Nations. [online]. Available at: [Last accessed 8th March 2014.]


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