Stepping back in time
At the height of his power in 1421, Emperor Zhu Di of the Ming Dynasty moved his capital from Nanjing to Beijing and invited foreign dignitaries to revel in the glory of his newly constructed ‘Forbidden City’. A true wonder, the Forbidden City was 1500 times the size of walled London, and housed 50 times London’s population.
In order to construct the City, a vast canal of 1800 kilometres was built to carry supplies needed to feed and house over 3 million workers and 1 million soldiers. So huge was the demand for food that famine broke out in the outer provinces. The large quantities of timber used caused deforestation and flooding in China and its neighbouring countries.
To avoid the devastating consequences of social unrest, China embarked on a period of expansion – marked not by conflict and colonization as was the European custom, but by trade, influence and, if required, bribery.
We can draw many insights from this period: the endurance of Chinese culture, its sheer scale and the consequences for the rest of the globe, which is, to some degree, influenced by Chinese economic cycles.
History repeats itself
Fast-forward a few 100 years. Today the Central Party views economic development as the yardstick of performance and the key to social stability. The Chinese single-minded pursuit of economic growth has resulted in an average annual economic growth rate of over 10% since 1980 and has lifted approximately 500 million of its citizens out of poverty. The last 30 years have been characterized by enormous capital spend, urbanization and growth in exports where China focused on quantity of production and positioned itself as the “workshop of the world”.
Initial responses to the crisis – a delicate balance
The 2008 economic crisis was devastating as America, Europe and Japan entered recession, freezing and reversing growth in exports. The Chinese authorities responded with unprecedented levels of economic stimulus, injecting 4 trillion yuan (USD630 billion) into its economy through a bank-lending program. The economy responded, moving to 9% growth in 2009, 10% in 2010 and 9.2% in 2011. The downside of easy money was, not surprisingly, speculative property inflation and consumer price inflation.
To avoid a destabilizing inflationary outburst, the People’s Bank of China tightened policy aggressively, raising interest rates and lifting bank reserve requirements. Restrictions were placed on multiple property purchases, demanding down payments from buyers and a cap on lending to developers. These restrictions remain in place. With the major engines of global economic growth knocked-out or idling for the foreseeable future, the question of a “hard landing” for the Chinese economy was and still is a possibility with chilling consequences for the global economy.
The key concerns for Chinese policymakers revolve around inflation and speculation. It is very likely that Chinese authorities will respond aggressively to any economic slump which would raise the spectre of social unrest. With inflation starting to slowly recede (moving to a level of 5.5% in October), the Central Bank has started easing restrictions, cutting reserve requirements at the start of December 2011.