China’s economy sailed through the financial crisis unscathed — at least in the short run.
When the global crisis hit, the country’s government-owned banks started lending out lots more money. The money came largely from the savings accounts of ordinary Chinese people. It went largely to finance big construction projects, which helped keep China’s economy growing.
“It sort of explains why China recovered so quickly,” Hu Angang, an economist at Tsinghua University, told us. Indeed, China’s strong showing through the crisis was seen by some as a vindication of the large role Chinese government plays in steering the country’s economy.
But if it turns out China doesn’t need all that new stuff it’s building, the country will face an economic reckoning, says Michael Pettis, who teaches finance at Peking University in Beijing.
For Pettis, China’s economic miracle is just the latest, largest version of a familiar story. A government in a developing country funnels tons of money into construction. This increases economic activity for a while, but the country ultimately overbuilds — and the loans start going bad.
“In every single case it ended up with excessive debt,” Pettis says. “In some cases a debt crisis, in other cases a lost decade of very, very slow growth and rapidly rising debt. And no one has taken it to the extremes China has.”
The counterpoint to Pettis’s argument: China is extreme. It’s a country of a billion people, growing at an incredible rate. The country needs to build lots of new stuff — new roads, new power plants, new buildings.
It’s been this way for decades, says Arthur Kroeber, who runs the Chinese research firm Dragonomics. When he first arrived in Beijing in 1985, the city had just finished building a new ring road — a highway that runs in a loop circle around the city center. It was so empty that he and his wife rode their bikes down the middle of the highway.
The long war in Afghanistan and the Trump administration
The United States wants to move beyond a Cold War-era approach to one of constructive engagement as a way to support and empower the Cuban people. Cuba needs the United States as an economic engine for its troubled economy and hopes to attract new foreign investment and human capital to update its socialist model, but without undergoing political reform. Building confidence and trust will be critical to the ability to move forward.