Explainer | China economy: 5 defining moments over the past 25 years
- China’s economy is grappling with multiple challenges and some observers say the situation could be a defining moment for the country
- But the world’s No 2 economy has been in similarly difficult positions before, from the global financial crisis to the trade war with the US
China is facing mounting economic pressure on a number of fronts, from a disruptive zero-Covid strategy being used to curb the spread of Omicron to market turmoil fuelled by Russia’s invasion of Ukraine and aggressive rate hikes from the US Federal Reserve.
As debate swirls in Beijing about how the government should respond, we take a look back over recent history to see how China has weathered previous economic challenges.
1998: State-owned enterprise reform
When Zhu Rongji took over the premiership in March 1998, the country was plagued by a variety of problems, including the aftermath of the Asian financial crisis, massive redundancies in state-owned enterprises (SOE), triad debt and a state-owned banking system ridden with bad loans and widely deemed by Western analysts as technically bankrupt.
National gross domestic product (GDP) growth slowed to 7.3 per cent in the first quarter of 1998, its lowest rate since 1992, and fell to 6.9 per cent in quarter two.
Zhu allowed scores of unprofitable small and medium-sized state firms to be closed and millions of workers to be laid off to improve efficiency in the sector. The premier also expanded long-term government bond issuance and unleashed two new engines of growth: home privatisation and large-scale college enrolment.
The property sector, in particular, has since become a pillar of economic expansion, with hundreds of millions of Chinese buying their own flats.
In 2016-17, the sector – including upstream materials and downstream furnishing and home appliances – accounted for more than a quarter of GDP growth, while its direct contribution was 7.3 per cent in 2020.
2008: The global financial crisis
When the global financial crisis erupted with the bankruptcy of Lehman Brothers in September, it quickly rippled through China, which relied heavily on exports to the United States and Europe.
Within one and a half years, quarterly GDP growth had plunged from 15 per cent to 6.4 per cent in the first three months of 2009. About 20 million migrant workers in coastal factories were laid off due to factory closures.
To staunch the economic damage, policymakers unleashed a flood of support measures to shore up growth.
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The stimulus package released by then-Premier Wen Jiabao was valued at 4 trillion yuan (US$627.8 billion), though the actual size was much larger with monetary loosening, the frenzied expansion of local financing vehicles and state-owned enterprises.
The heavy dose of stimulus generated quick results with massive infrastructure construction – most notably development of China’s high-speed railway network – that helped push GDP growth to 12.2 per cent in the first quarter of 2010.
However, the stimulus drew criticism about the re-emergence of the state as the prominent player in the economy, while undisciplined spending led to the accumulation of trillions of yuan in local debt – a time bomb that continues to haunt the Chinese economy.
2015: Stock rout and capital exodus
China’s stock market hit a seven-year high of 5,178 in June 2015, fuelled by extraordinary market optimism and the fast rise of margin leverage.
The rally – the benchmark Shanghai composite index rose 53 per cent in 2014 and 60 per cent in the first half of 2015 – did not last long and the market soon collapsed, wiping out trillions of yuan worth of wealth from individual and institutional investors.
It forced Beijing to take unprecedented relief measures, including direct purchases in the market through a “national team” of investors. Several high-ranking securities officials were investigated and prosecuted for the rout.
Meanwhile, Beijing’s decision to depreciate its currency by about 2 per cent against the US dollar in August fuelled capital exodus. The country had to burn about a quarter of its forex reserves and resort to strict capital controls to defend the yuan over the next two years.
The market rout paved the way for policymakers to defuse the country’s financial risks in a deleveraging campaign that started in 2018. It has been frequently cited as a lesson since the US Federal Reserve started a new round of rate hikes this year.
2018: US-China trade war
The trade war stoked significant concern in China because the US was the top destination for Chinese merchandise. At its quarterly economic analysis meeting in July 2018, the 25-member Politburo decided to prioritise the stabilisation of employment, finance, foreign trade, foreign investment and market expectations.
To help offset the external uncertainty, Chinese authorities in 2020 announced a new economic strategy called “dual circulation”, which leans more on the domestic market for technological development and future growth.
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2020: Coronavirus pandemic
After quickly sealing off Wuhan, the original epicentre of the pandemic on January 23, 2020, Chinese leaders convened a virtual meeting with 200,000 local cadres to mobilise mass lockdowns across the country.
The move prevented the spread of the virus, but with large swathes of the country shut down in the first three months of the year, the economy shrank by 6.8 per cent in the first quarter – the first contraction since the end of the Cultural Revolution in 1976.
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China’s central bank alone pumped 9 trillion yuan of liquidity into the banking system through relending, open market operations and other monetary tools.
Beijing’s successful handling of the initial outbreak has boosted confidence in its hardline containment model.
It has clung to the zero-Covid strategy despite much of the world moving to live with the virus and amid current outbreaks of the highly contagious Omicron variant.
