Until 2020 China has not suffered a recession in recent history, at least on the official data, but it has gone through three big cycles, in the 1990s, early 2000s and since 2009, broadly – but not exactly – in line with the US. Within those big cycles, and especially in the most recent cycle, the data show mini cycles. There were troughs in Q3 2012, Q3 2015 and, I suspect, a new trough will be recorded in either Q4 2018 or Q1 2019.

 

First, lets look at the big cycle. After Deng Xiaoping’s opening from 1978 onwards, China began to grow very fast in the 1980s before slowing during the 1990s. This slowdown was partly inevitable after such a surge, but also reflected policy as the authorities, under Jiang Zemin, worked to bring down inflation and implement policy reforms, including restructuring many state owned enterprises. Growth went through a prolonged slower period from 1998-2001, partly because of policy and partly influenced by the world recession in 2001. Then growth took off again, powered by exports initially, with the help of WTO membership, and later by a domestic investment boom.

 

When the US led the world into a recession in 2008-9 China was hit hard, then rebounded quickly following a massive fiscal and monetary stimulus programme. But growth has been slowing again since 2010. Over the last 20 years China has become much more important in the world economy and therefore its cycle has more influence on other countries. At the same time its increased openness to the world means that it also is more susceptible to economic influences elsewhere, primarily from the US and EU.

 

The official GDP data show the big cycles clearly enough, but since 2009 at least, it is hard to see the mini-cycles. The mini-cycles in the last 10 years seem to be due to a combination of domestic policy and foreign influences. After the stimulus splurge in 2009 the authorities realised that they must pull back, which they did by tightening credit. This, together with the effects of the euro crisis, caused a slowdown in 2010-11. By then, China’s exports to the EU exceeded those to the US and Europe’s double dip recession hurt.

 

The response in 2012 was to ease up on austerity and encourage renewed growth. It is hard to see that in the official GDP numbers but it is pretty clear from the Li Keqiang activity index. This is an index named after China’s Premier who is (officially) number two after Xi Jinping. Li Keqiang reportedly commented in 2007 that he doubted the GDP figures and preferred a simple activity index composed of 3 indicators (railway freight, bank lending and electricity output). I doubt that this index is any more reliable than the official GDP numbers in giving us the level of GDP growth, but it has not been smoothed out like GDP so it is more useful, at least recently, for the cycle.

 

The mini-cycles can also be seen in the pattern of Total Social Financing. This is an official number which tries to capture the total lending into the economy. It is measured in Renminbi so naturally grows over time but (when smoothed as a 12-month moving average) it shows clear retracements in 2010-11 and then renewed expansion in 2012. Again, a word of caution on the numbers here. Whenever the authorities try to squeeze credit there is a real effect and a statistical effect. The real effect is that credit actually does get squeezed somewhat. The statistical effect is that financial institutions find a way to keep credit going that is not captured by the TSF statistic. As elsewhere with financial statistics, the statisticians are always running to catch up, so it is unlikely credit actually fell as much as the data suggests. But it was at least crimped.

 

After a strong pick-up in 2013 China’s growth faded again, this time mainly due to domestic policy. The authorities were increasingly concerned about the growth of debt and knew they had to slow it down. But by 2016, exacerbated by slower growth in the US and Europe (partly in response to China’s slowdown but also influenced by an inventory cycle), China was too weak and so once again there was a big stimulus.

 

Another data series that shows the mini-cycles is industrial production but here we have to allow for the fact that IP growth is on a declining trend. When the authorities pulled the stimulus levers in 2012 and again in 2017, IP stopped falling but didn’t really pick up. In part this reflects one of China’s key problems, the overcapacity in the industrial sector which is bearing down on new investment. And in part it is due to the declining importance of manufacturing. The 2016 stimulus faded again in 2018 and the resulting slowdown occasioned yet another stimulus in late 2018/early 2019 which supported the economy in 2019.

​

However the coronavirus is likely to have cut China's GDP by around 20-30% in Q1 2020. The full decline in output for a few weeks may been as much as 50%. A strong bounce is expected in Q2 provided that infections do not rebound, but overall GDP growth this year is likely to be much weaker than 2019. 

​

Last updated March 31st 2020

.