This article is part of China Insight, a series of articles by NBR writers in China and Evanston examining the many issues that make China what it is today in the world economy.
Any student in Professor Witte’s Economics 101 class learns about the business cycle. Economies cyclically experience boom times of rapid growth and expansion and readjustment periods including the current Great Recession. But from the numbers, at least, China’s economy is worryingly immune to any slowdown.
China’s economy grew at 10.3 percent last year. From 2000 to 2011, the Chinese economy measured in GDP grew at 8 percent or higher. It’s growth rate ranks 6th fastest in the world.
In per capita terms, China is not a rich country—much of the rural population work low-yield factory or farm jobs—but its economic might is unquestioned.
Behind the numbers, many people in China that I met while living and working in China in 2009 worry about the ‘crunch’ of China’s incredible growth. Everyday, tens of thousands of people pile off of buses and trains in central-eastern cities in search of work. Combined with increasing interest in Chinese businesses from foreign investors and strong export numbers, China is in the middle of a boom cycle.
However, this situation should paradoxically cause concern for China-focused professionals, and potentially for job seekers as well. As Warren Buffett cautions us, “Be fearful when others are greedy, and greedy when others are fearful.”
China has not experienced negative economic growth since capitalist reforms set it on its current economic warpath. In 1976, the Chinese economy shrunk by 1.6 percent. However, a few years later, under Chairman Deng Xiaoping’s “Reform and Opening Up” plan, China unleashed its capitalist forces and overturned much of the failed economic policies of his predecessors. Since then, China’s growth has hovered above 5 percent. In 2007, it peaked at a truly astonishing 14.7 percent.
By comparison, India has grown at similarly non-negative, non-stop rates, but without the same extremes as China. Its year-to-year growth has never surpassed 10 percent, and it tends to grow slightly above the 3 percent threshold needed to keep up with their simultaneously impressive population growth.
The case can be made that either China is cooking the books or that China is in for a painful readjustment. China’s exceptional growth seems to defy basic economic theories about the business cycle—gleaned from the first chapter of most macroeconomics textbooks. How can a country sustain itself indefinitely?
Many other investors are pessimistic. One prominent Turkish-American economist thinks so. Nouriel Roubini, the man who presciently predicted the housing bubble of 2008, believes China is on a collision course. He considers many of China’s infrastructure projects redundant excuses to keep shovels at work. He points to 2013 as the year of Chinese Reckoning.
Developing economies have vastly different policies, processes, and infrastructure compared to their developed neighbors. However, at a fundamental level, economics insists that countries must cool down or face staggering contraction. For China, the political repercussions of a sustained downturn remain to be seen.
Before I took any economics course at Northwestern, I lived in China and met people who had on the one hand benefited from China’s growth, but who were cautious about its future. “Sustainability” is a buzzword these days and, ultimately, merits some consideration in the case of China’s inevitable business cycle. Even one of Professor Witte’s macroeconomics students could tell you that.