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Published on Oct 21, 2015
A very poor country turned modern economy, China is now facing economic hardship. How did this happen? What led to its astonishing economic growth and what’s fueling its current woes? Join Tyler Cowen as he dives into the rise and fall of China’s economy.
Many of China’s current problems are rooted deep in the country's economic history. We start our discussion in 1979 when Chinese reformers introduced the concept of private property and more capitalistic incentives, privatized agriculture, and allowed for more manufacturing and exporting — all of which put China’s economy on an upward trajectory.
Along with these reforms came transformational growth. For much of the past 35 years, China’s GDP per capita has grown at about 10% per year. In other words, living standards in China doubled about every seven years.
What did the economy look like during these periods of rapid growth? High levels of savings and high levels of investment, especially in infrastructure projects. China’s economy required more complex investments too — in health care and and start-ups, for example.
A turning point for the Chinese economy came in 2009. With the recession affecting many other countries, China’s government took steps to avoid the recession and keep the economy afloat, but at a cost. Debt skyrocketed during the period, which is proving less sustainable as China’s rate of growth declines.
There’s some discrepancy over China’s current growth rate — the Chinese government claims 7% per year, but external observers predict this rate is much lower, and that China is now entering a recession. To gain a better understanding, we take a look at five specific areas in this video: the real estate bubble, the stock market bubble, the excess level of municipal debt, the excess capacity among Chinese businesses, and the risk of capital flight. When you consider all of these areas together, it paints a very complex picture and one which is proving difficult for China to manage.
Even still, there are reasons to remain optimistic. China has invested tremendously in human capital, which is one of the most valuable assets to any modern economy. These investments in human capital will certainly survive the current recession and help facilitate a bright economic future.