China’s decade of extraordinary growth from 2008 is lost on its critics. Why?

Serious challenges on several fronts in that year did not deter the authorities from pressing on with a commitment to change the Chinese growth model
The story of how these efforts contributed to the rise of the middle class and the emergence of a world-leading digital economy demands a fuller understanding

Prof Zhang Jun

Published: 1:00pm, 3 Apr 2019

Why you can trust SCMP

For the West, the year 2008 marked the beginning of a difficult period of crisis, recession and uneven recovery. For China, 2008 was also an important turning point, but one followed by a decade of rapid progress that few could have foreseen.

Of course, when the US investment bank Lehman Brothers collapsed, triggering a global financial crisis, China’s leaders were deeply worried. Their concerns were compounded by natural disasters – including severe freezing rain and snowstorms in the south in January 2008 and the devastating Sichuan earthquake four months later, which killed 70,000 Chinese, as well as unrest in Tibet.

At first, China’s fears seemed to be coming true. Despite hosting an impressive Olympics in Beijing that August, its stock market plunged from its 2007 high of 6,124 to 1,664 in October 2008, in what amounted to a record-breaking crash.

But the Chinese authorities remained dedicated to their long-term plan to revise the country’s growth model, by shifting away from exports and towards domestic consumption. In fact, the global economic crisis served to strengthen that commitment, as it underscored the risks of China’s dependence on foreign demand.

Chinese mark the 10th anniversary of the massive earthquake that hit Sichuan in 2008, on May 12 last year at an event in Beichuan county, one of the worst-hit areas. Photo: EPA-EFE

This commitment has paid off. Over the past decade, many millions of Chinese have joined the middle class, which is now 200-300 million strong. With an average net worth of US$139,000 per person, this group’s total spending power could amount to over US$28 trillion, compared to US$16.8 trillion in the United States and US$9.7 trillion in Japan.

China’s middle class is already wielding that power. China accounts for a significant share of global luxury purchases. Though per capita car ownership is only around half the global average, since 2008, the Chinese have consistently been the world’s leading auto purchasers, surpassing Americans. In 2018, Chinese travellers made 140 million trips abroad.

For China’s authorities, fostering the emergence of such a formidable middle class was a crucial strategic opportunity. As Liu He, Chinese President Xi Jinping’s top economic aide, wrote in 2013, the goal for China, prior to the crisis, lay in becoming a global production centre; achieving it would attract international capital and knowledge.

After 2008, China’s strategic imperatives shifted to reducing debt risk and boosting aggregate demand, while deploying massive economic stimulus to encourage domestic consumption and investment, thereby decreasing China’s vulnerability to external shocks.

Chinese tourists visit Red Square in Moscow, Russia. In 2018, Chinese travellers made 140 million trips abroad. Photo: EPA-EFE

As part of this initiative, China pursued large-scale infrastructure investments, such as building nearly 30,000km of high-speed railway. Increased connectivity – last year alone, that railway network carried over three billion passengers – facilitated much closer regional economic ties, propelled urbanisation and enhanced consumption substantially.

Thanks to such efforts – together with mergers and acquisitions to acquire key technologies and lucrative infrastructure investments in developed economies – China’s economy almost tripled in size from 2008 to 2018, with GDP reaching 90 trillion yuan (US$13.6 trillion). Whereas China’s GDP was 50 per cent smaller than Japan’s in 2008, by 2016, it was 2.3 times larger.

To be sure, difficult challenges emerged. Land and housing values soared, with urban real-estate prices rising so fast that many feared a bubble. Credit growth raised further risks. Overall, however, expansionary policies supported China’s rapid emergence as a global economic power globally.

But China’s leaders did not plan one crucial feature of this growth pattern, let alone bring it about with industrial policy: the consumption-focused innovative industries that barely existed in 2008 and that are increasingly propelling the Chinese economy today.

China is now the global leader in e-commerce and mobile payments. In 2018, mobile payments in China amounted to US$24 trillion – 160 times the US figure. The state-owned banks and petrochemical companies that were China’s top-ranking firms in 2008 have been surpassed by e-commerce and internet giants Alibaba and Tencent. Internet and technology firms are now creating tens of millions of jobs per year.

Meanwhile, the performance of the manufacturing sector – long the main engine of China’s development and still the country’s largest employer – has weakened, undermined in part by rapid wage growth. The result has been a fundamental change in the structural composition of China’s economy.

Yet, rather than exploring this shift – which is not captured in traditional measures of GDP – many economists have focused on trying to poke holes in China’s growth narrative. A recent Brookings Institution study, for example, estimates that China’s economy is about 12 per cent smaller than official figures indicate.

This does little good. The changes China’s economy has undergone over the past decade are sweeping, unprecedented and essential. The world would be far better served by an effort to understand them than by attempting to prove that the country’s achievements are less impressive than they are.

Zhang Jun is dean of the School of Economics at Fudan University and director of the China Centre for Economic Studies, a Shanghai-based think tank. Copyright: Project Syndicate

This article appeared in the South China Morning Post print edition as: A decade of change

Post