How does the Chinese economy keep recovering each time?

It seems to be yet another cycle of China taking a temporary downturn and the economy picking itself up again and resuming its upward course, albeit at lower growth rates.  Why does this pattern keep repeating?  What could be going on?

1. The government keeps spending from its $3 trillion reserves stash and through direct fiscal policy it keeps Chinese workers employed and thus avoids the worst of the business cycle.  (NB: This is in general not a good understanding of what is going on, but it should make the list of possibilities.)

2. Worker productivity is going up ??% each year, through the importation of technical progress and the capture of low-hanging fruit.  So China keeps on hitting negative shocks, sticky nominal wages won’t fall, trouble is about to hit but then higher productivity kicks in quickly to keep unemployment down.  The economy then resumes its upward course, although hitting some bumps and snags along the way.

3. State-owned enterprises are told to keep on producing more and investing more.  This worsens their long-run profitability problems, due to collective excess capacity.  But in the short run (how long is that short run now?) both aggregate demand and aggregate supply stay fairly high.  When the profitability constraint hits, though, it will be a doozy.  Unless of course the government resorts to #1, postponing the problem even further.

4. China already has hit a recession in terms of living standards, we are simply mismeasuring the rate of inflation in the country.  And since real wages are falling (for some workers) and nominal gdp stays on a decent (or maybe even excessive) growth path, the country does not experience a traditional recession.

5. Through the use of monetary/fiscal policy and SOEs, the government keeps on boosting the supply of credit.  Since there has been a significant underemployment of resources in China, higher credit induces a self-sustaining positive response from the supply side.  There are then two options for the future:

a. China is still at a margin where this credit process is largely self-financing, or

b. China is now at a margin where soon enough the bills can no longer be paid.

I am not seeking to persuade you of any of these views, I am simply listing some possibilities.


Imagine if the Fortune 500 CEOs controlled U.S. economic policy. Would they be able to boost monetary and fiscal policy and the right moment to make sure they always beat earnings? They'd at least be much better at it than academics and politicians who get the signals far too late.

Re: SOE profitability, there's already the argument that SOEs are not profitable; their profit comes entirely from their ability to pay no rent for land, spectrum, etc. plus monopoly privileges. The state sector, including the banks and local govt entities, are bloated with bad debt, while the small and medium enterprises are starving for credit. There is a scenario where there can be high growth, but it involves taking capital away from the state sector, constraining the ability of SOEs and local governments to operate given their debt levels. This would effectively end the China development model of private real estate development and public infrastructure investment. Lots of people do not want to see that happen, namely most of the members of the CCP.

The public seems to be in on the game. More and more they expect high inflation and eventually currency depreciation.

"Imagine if the Fortune 500 CEOs controlled U.S. economic policy."

Why did you add an "imagine if" in there? Our federal and state histories are full of examples of just that. (I'll add a "not that's there's anything wrong with that")

What about the fight for the right to vote in Hong Kong?

I love those guys, but think it's an unlikely explanation for China's strong economic growth.

Haha. I mean, how easy is to keep politics as the last 30 years if people starts to revolt?

Reason #3 sounds persuasive, which is the Asian model of capital deepening and overcapacity. Here they run trends into the ground.

I also like the conspiracy theory that China misstates their statistics, including not just GDP but population (which is probably 30% higher than it really is). I've since seen these views expressed in print.

You think the Chinese population is 30% higher than they claim? So 1.7 billion people rather than 1.3 billion? Well.. that is quite a conspiracy theory.


Trusting all of the statistics coming out of China would be a mistake... Population? Almost certainly accurate (or at least as accurate as any other country).

A density and energy analysis shows China's population is not 1.3B but more like 1B. You read it here first. Other big countries are similar. No I won't share my research...just trust me on this. I also showed, well before an academic said the same thing, that China's GDP was inflated in the late 1990s.

"A density and energy analysis shows China’s population is not 1.3B but more like 1B. No I won’t share my research…just trust me on this."

Well okay, then! I know *I'm* convinced.

Wrong. At least half of my coworkers have been born under extra-legal circumstances, either at home or by bribing a doctor to overlook the one child policy regulations. Likewise you can buy an ID card when you turn 18.

Depends entirely on how they run the census. If they are going door to door, there will be massive undercounting as there is huge incentive to lie. If they are counting ID cards, that is still misleading because cards can be faked. My Chinese colleagues think the true population is much larger than 1.4 billion.

@Andao, thanks for that note, I use secondary sources (energy analysis, satellite density photos, all in the public domain) while you are using primary sources (your contacts who live in China). We both agree China's published population figures are wrong. I would merely caution that I've read that Chinese nationalists like to brag their population is bigger than what is published, so that's simply something to factor into the analysis.

the fact that none of these stories are particularly convincing tells us more about the state of modern macro than it does about china.

It's a version of #2. Adam Smith had the answer - there is a lot of ruin in a nation. A billion people working hard to better the lives of themselves and their children produce a huge momentum towards economic growth that ordinary misgovernment can't stop. It would take another Great Leap Forward or Cultural Revolution to do that.

Indeed. There are still vast numbers of people whose lives can improve quickly and measurably, there is a market and a means.

Is anyone going to rewrite the story of the Great Depression and the Presidency and Central Bank that presided over it in the light of what is happening in China?

Actually someone already has.

I'd agree that's a major part of it, but considering the relative starting point of the recent Chinese economic run, their growth rate anymore does imply a fairly substantial degree of mismanagement and misallocation of resources. With their present population, the fact that people have doubts about China's ability to pass the US in GDP is nothing short of astonishing - considering the population disparity, all it would take would be a China with per capita GDP comparable to that of Kazakhstan or Poland to reach that threshold. It doesn't take a highly dynamic economy to reach those levels of economic activity, suggesting that even modest improvements in productivity improvement are largely absent from the Chinese economy, with the implicit assumption (as you state) that almost any marginal actions taken on a widespread level outside of governmental action could be enough to mask (swamp?) other weaknesses. Considering the current level the economy as a whole has, the as of yet untapped potential is markedly greater than the economy itself at present.

The point remains that China is a nation with significant underinvestment in human capital, as both a function of potential relative to an OECD-like economy and of the vast disparity (inequality?) witnessed both within urban areas and between urban and rural areas.

Read this

From other FT articles:
Industrial production, a key driver of China’s economy, rose by 9.2 per cent in June, the strongest pace since December, the National Bureau of Statistics said.
Fixed asset investment grew at 17.3 per cent year-on-year in the first half of the year, up from 17.2 per cent in the five months to May. Real estate investment continued to suffer, however, with growth slowing to 14.1 per cent in the first half from 14.7 per cent in the first five months. The resilience of overall investment even in the face of falling property investment suggests that state-backed projects have helped to fill the gap."

Consider the three components of the “Keqiang index”, named for premier Li Keqiang’s leaked admission that he did not trust official gross domestic product data (statistics with Chinese characteristics, perhaps).
Electricity use shrank at the fastest annual pace in more than a decade earlier this year, but by last month had recovered to rise almost 8 per cent. Rail freight had been dropping at more than 5 per cent, but the drop last month improved to 1 per cent. The broadest measure of lending, known as total social financing, was falling at more than 10 per cent annually, raising doubts about China’s debt-financed growth model. In May and June, it recovered sharply, with only seven months in the past 10 years seeing more lending than June.

#1 is the main thing this quarter, #2 #3 #5 with some small quibbles to your descriptions apply more generally. but who knows lol

Maybe the Chinese economy is so behind capital that the country simply grows whatever is built even if it should be malinvestment.

Otherwise, China still has relatively low wages, a huge population, and enough state run businesses that it blaze right through downturns.

Tyler (and everyone else),

What do you think?

I think China will continue to get richer and that this is a good thing.

Well, unless it convinces everyone that one-party governments and state-owned enterprises are the way of the future.

It is annoying how people think that the Chinese have a particularly good economic model. This is just what happens when a country develops and urbanizes. The freaking Soviet Union grew much faster than the West from the 1920s through the 1960s, not because any particular brilliance of their economics, but because they were moving from a peasant society to a modern, urban society. It is a point in a government / economic system's favor that it can successfully manage this transition, but at this point we know there are a number of different models that can successfully develop a country.

No country of anything approaching China's scale has urbanized, nor has any large country developed as rapidly as China has since the 80's. You can be annoyed all you like, but most countries fail to achieve the type of meteoric growth that China and other East Asian nations have experienced.

Most advanced countries developed at a time when the technology and knowledge to create a highly productive workforce did not exist. England driving the industrial revolution is a hell of a lot more impressive than anything the Chinese government has managed.

All China has demonstrated is that they have a better economic model than what is common in Africa. They're not even doing better than Mexico yet.


Japan's economic growth from 1950 to 1970 was slightly faster than China's more recent growth.

Starting the industrial revolution is more impressive than copying it. However, China is far beyond Mexico substantively (if not in per-capita GDP). China produces an astonishing array of medium and high-tech goods. China is the largest exporter in the world. No one questions the ability of the Chinese government to undertake and complete gigantic projects. China already has a vast scientific establishment. The list goes on and on.

What about the good ol' fashioned Solow model? Capital deepening => declining growth rates. There are all sorts of scary headlines about real estate, the banking system, etc. but they don't translate into real recessions because letting a screwed up banking system tank your economy is a political choice that the Chinese gov't has chosen not to make, not a necessary macro-economic one.

#6 China's numbers are too unreliable and the state of the Chinese banking sector is too opaque to reliably tell what is going on.

Mostly 2 (the shiny coastal cities also make it easy to forget how poor China is overall) but also some 3.

4 is really a question of who you are, I think. If you're a low wage worker living in an industrial area, the environmental conditions can be pretty awful. If you're a high-ranking apparatchik aristocrat, the fine wines keep flowing and you never even have to see the ugliness.

That dichotomy is probably the one thing the ChiComs are most terrified of, especially once the catch-up growth ends and they have to allow creative destruction that will personally threaten many Party fortunes -- so ironically their professed Communist principles maybe the main thing promoting real growth right now.

SOE's are not there to be profitable. They are there to be 1) tools for government to control the economy 2) produce goods, whether required or not 3) provide employment 4) as an arm of the government in acquiring foreign assets 5) make PRC look good in areas that is important to the CCP. So what if they are not profitable ? PRC government can always pour more money in them. That's why no for profit business can ever compete with PRC SOE's.

No, #1 should not make the list of possibilities. There is no way to spend a foreign reserve stash domestically. The relationship between reserves and fiscal spending as listed is totally wrong.

And if you used it to buy assets abroad 1) the assets would presumably be worth the same as the $3 trillion anyway and 2) that would drive up the value of CNY and RAISE unemployment.

My explanation would be:

1) Massive infrastructure spending. Previous officials were fired for not spending stimulus funds fast enough. So now they are spending even more urgently, on less useful projects
2) Recovery of main export markets
3) Massive monetary base expansion, loan expansion, and free loan rollovers
4) Some degree of the middle class increasing consumption.

The methods they are using aren't sustainable. Even with the economic recovery in the West, many factory parks I've been to are more desolate than they were even in 2008. Either they move quickly to domestic consumption, or the infrastructure bill is going to come up soon, and there will be no cash to pay it. No one is going to tolerate a huge debasement of the yuan to reignite the export engine.

Nothing useful in these comments. You could express a view, Tyler.

Something about the price of oil, mumble mumble

How about all of the above. Mainly a long run export led growth story (#0), with short term adjustments covered up #1, #3 and #5. Each financed and supported by ensuing recovery in #0. #4 might be happening right now, but will fail to show in numbers for a while. #2 is most likely on a downward marginal gains curve. Add #6 -- currency manipulation to steal export growth from other developing countries (indonesia, india, vietnam, thailand, s africa....). Plus, #7: expanding markets for exports (latin america, africa, south asia). Plus #8: domestic consumption growth. And lastly #9: the undying belief of the people of the people's republic in the final destiny of world domination by the middle kingdom: ergo, growth will never stop. The last one is underestimated, and when proven false, will lead to interesting consequences.

The simple answer is that China practices RGDP growth-rate targeting. If the rate drops below target one quarter it's usually going to move back up the next.

I understand you're looking for a broader answer for how China does that and whether it's sustainable. You're not likely to find much from MR commenters. All I can say is China has a mix of fiscal and quasi-fiscal (eg state banks) levers it uses to meet RGDP targets, and some of these are clearly overstretched, but others eg central government have lots of dry powder. And China does have genuinely rapid productivity growth, which you can see from its continuing rise in terms of share of global trade.

It's a bit like the goldbugs predicting hyperinflation for so long.

Well, if the hyperinflation never comes, the goldbugs have a problem on their hands. Similarly, if one-party government and state-owned enterprises continue to bring prosperity to China, classical liberals like myself have a problem on our hands.

It seems that Chinese officials are just determined to keep the economy growing to provide jobs for millions or they will lose their mandate (of heaven). Part of it is "creative" public finances and statistics. It is a known fact that China has two official government statistics: one for the general public and the other for public officials. Another explanation is that household and public debts have been rapidly expanding and fueling a housing bubble and ghost towns. Nevertheless, Beijing has already began to develop its services sector and needs to rein in (privatize) highly inefficient and spendthrift SOEs. A wise man once said that China is like riding a bicycle, you fall down when you stop pedaling. Check out my blog

two factors that may be big drivers of #2:
- the government is loosening the constraints on settling in cities.
- huge infrastructure investments over the last decade, many of which appeared excessive initially, will now be yielding productivity returns

I agree with everything Tyler said, but I would suggest the following as an easy logic for the big picture.

Fast, GO GO GO. Woops, don't overheat. Slowdown, we don't want to crash. Faster, faster, GO GO GO GO! Woops, don't crash. Overheating, overheating! Slow down, woops, don't charge too much for that please (NOW) because people need/want it. GO! woah, wait. Go, go. Faster please. Don't crash, but risk overheating because we can cool off quick.

Plus Solow logic.

I every time spent my half an hour to read this weblog's posts all the time along with a mug of coffee.

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