Introduction
While progressive economists often laud China’s massive stimulus package following the 2008-09 global financial crisis, which amounted to 12.5% of its GDP, others argue that this Keynesian masterstroke has sowed the seeds of many current challenges for China.
The Initial Stimulus and Its Aftermath
China’s initial stimulus package, launched in late 2008 and lasting until 2010, did not mark the end of government support. By allowing local governments to borrow off-books and guaranteeing local construction companies’ bonds, China provided substantial backing to the infrastructure and real estate sectors. This extended stimulus for a decade has led these sectors to now account for roughly one-third of total demand, far surpassing levels in the EU, Japan, and the US.
Impact on Private Sector Activity
A recent Brookings paper by Princeton economist Wei Xiong and co-authors sheds light on how prolonged governmental stimulus in China has affected private sector activity. Analyzing local data, they show that provincial GDP growth was strongly correlated with corporate profits and retail sales between 2002 and 2008, contrary to standard Keynesian models’ expectations. Surprisingly, these correlations vanished entirely between 2011 and 2019. Another analysis in the same document reveals that city-level productivity growth, considering capital and labor inputs, was robust before stimulus but significantly decreased in subsequent years.
Declining Returns and Housing Market Woes
The Chinese construction sector has generated diminishing returns over years of overbuilding, creating an excess of housing that has driven prices down in many cities. Given the substantial role of the housing sector in Chinese household wealth, it’s no surprise that consumer demand has plummeted, triggering deflation even as official GDP growth figures hover around 5%.
Government Role and Hybrid Economy
Western analysts often express frustration with China’s reluctance to implement a significant consumer demand-boosting stimulus package, like the direct cash transfers during the COVID-19 pandemic in the US. However, they often overlook a crucial point highlighted by Wei and co-authors: China is a hybrid economy where the government plays a far more central role than in any developed nation.
The Path Forward
China’s policymakers must eventually cede some power to local governments and, crucially, the private sector for sustainable growth. The US President Donald Trump’s trade war has made it even more urgent for China to revitalize its private sector, as exports remain the most dynamic and competitive part of China’s global economy. With this engine faltering, the government must find new growth sources, and only the private sector is equipped to tackle this challenge.
Lessons from China’s Stimulus
Despite China’s impressive economic achievements in recent decades, the post-2008 massive stimulus was not the resounding success many progressive Keynesians claim. Instead, it should serve as a cautionary tale. One outcome is China’s rising debt-to-GDP ratio, further limiting the government’s ability to stimulate the economy. The IMF’s Fiscal Monitor predicts China’s public debt will exceed 100% of GDP by 2027, and over 300% including corporate and household debt. While some argue low Chinese interest rates make this debt load manageable, history shows that prolonged periods of low rates can eventually lead to slower growth, as seen in Japan over the past three decades.
Key Questions and Answers
- What were the consequences of China’s massive stimulus after 2008? The stimulus led to a rise in China’s debt-to-GDP ratio, limiting further government economic support. It also resulted in diminishing returns from the construction sector, causing housing market woes and deflation.
- How has China’s hybrid economy influenced its response to the 2008 crisis? China’s hybrid economy, with a more central role for the government compared to developed nations, shaped its crisis response. Policymakers initially defended the status quo by pointing to rapid economic growth, but this argument has less weight now as growth quality has consistently declined.
- What challenges does China face in revitalizing its private sector? China’s policymakers must transfer power to local governments and the private sector for sustainable growth. The US-China trade war has made it more urgent for China to boost its private sector, as exports are crucial to driving productivity and overcoming the current economic slump.
The Author
Kenneth Rogoff, former chief economist at the International Monetary Fund, is a professor of Economics and Public Policy at Harvard University and winner of the Deutsche Bank Prize in Financial Economics (2011). He is co-author, with Carmen M. Reinhart, of ‘This Time Is Different: Eight Centuries of Financial Folly’ (Princeton University Press, 2011) and author of the upcoming book ‘Our Dollar, Your Problem’ (Yale University Press, 2025).
Copyright: Project Syndicate, 1995 – 2025
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