Economic Fluctuation Report of China

Author: Hu Angang
Publisher:
Publish Date: 1997-12-01
Features: Chinese Summary of China's Business Cycle Report
Economic cycle fluctuations are an important phenomenon in economic development. They manifest as economic expansion giving way to contraction due to resource supply constraints or consumer demand constraints, and economic contraction re-entering expansion due to abundant resource supply or consumer demand pull, creating a continuous cycle. Typically, economic cycle fluctuations are considered a product of capitalist economies. Socialist countries have universally denied the existence of economic cycle phenomena. However, post-World War II economic practices in the former Soviet Union, Eastern Europe, and China have shown that socialist countries not only experience economic cycle fluctuations but also multiple economic recessions, even economic crises. International comparative studies indicate that China is one of the world's fastest-growing economies and also one of the most economically volatile countries. Together, these constitute two significant characteristics of modern China's economic growth. This book primarily discusses two fundamental questions: first, why does China's economic development always experience large fluctuations? Second, how can these fluctuations be prevented or avoided? These two questions are interconnected. Only by objectively acknowledging this phenomenon and seriously analyzing its essence and root causes, while conscientiously adhering to economic laws, can we prevent large economic fluctuations. The essence of the above issues lies in how China balances economic growth and economic stability during its take-off phase.
Characteristics of China's Economic Cycle Fluctuations
Over the past 40 years since the founding of the People's Republic of China, the country has experienced multiple economic cycles and adjustments. One of the law-like characteristics of China's economic development is the cyclical fluctuation of the growth rate of economic growth—decline—rebound—decline, accompanied by the repeated changes of expansionary—contractionary (adjustment)—reexpansion—recontraction (readjustment) economic policies. The large fluctuations in economic development are not only one of the most prominent features of China's economic growth but also one of the sources of social conflicts. China's economic and social development practices have shown that economic stability leads to social and political stability, while economic instability leads to social and political instability.
The main characteristics of China's economic cycle fluctuations are as follows:
- Economic growth exhibits significant cyclical fluctuations. Economic development is characterized by ups and downs, with large fluctuations being inevitable. Since the reform, four expansions and three contractions have occurred.
- The length of each economic cycle varies irregularly, generally with expansionary phases longer than contractionary phases.
- The amplitude of each cycle fluctuation (referring to the standard deviation of real GNP growth rate from the mean growth rate) varies greatly, and since the reform, the amplitude of economic fluctuations has shown a clear downward trend.
- Economic fluctuations severely impact economic growth. The higher the economic fluctuation coefficient (the ratio of the standard deviation of real GNP growth rate to the mean growth rate), the lower the mean economic growth rate; conversely, the lower the coefficient, the higher the growth rate. Since the reform, the economic fluctuation coefficient has declined significantly, closely related to changes in the decisive factors of China's economic growth path. However, economic fluctuations and instability remain core issues.
- Each pair of short cycles constitutes a medium cycle, with major economic adjustments occurring approximately every 10 years.
- China's economic fluctuation coefficient is significantly higher than that of Western countries and far exceeds the world average. According to the author's calculations, from 1960 to 1989, China's economic fluctuation coefficient was about 1.8 times that of former Yugoslavia, the UK, and India; 2.2 times that of the US; 2.6 times that of Japan; 3.0 times that of South Korea; 3.4 times that of the former Soviet Union; and 4.3 times the world average.
- China's economic fluctuations are primarily driven by external shocks with internal transmission as the foundation. The cyclical component reflecting external shock effects has a relatively high amplitude, while the trend component reflecting internal transmission effects is also higher than that of the US during the same period. Additionally, China's economic cycle fluctuations exhibit other characteristics. For example, in addition to fluctuations in economic aggregates (GNP), there are fluctuations in 10 major types of economic variables: production, investment, consumption, wages, money, credit, prices, fiscal revenue and expenditure, trade and inventory, and foreign trade. China not only experiences national economic growth fluctuations but also regional economic growth fluctuations, reflecting that any economic policy (whether expansionary or contractionary) implemented by the central government will have a profound impact on the overall situation.
Massive data and facts demonstrate that China's economic cycle fluctuations are highly pronounced, with economic growth remaining highly unstable. This frequent and large-scale cyclical oscillation severely hinders the sustainable development of the Chinese economy.
Process of Economic Cycle Development: From Peak to Trough
Although each Chinese economic cycle and major economic adjustment differ in many aspects, they share similar processes and characteristics. Each economic cycle generally goes through four stages:
1. Economic Recovery or Expansion
Assuming economic growth enters the recovery phase from the previous low point. Due to the large amount of idle production capacity and potential capacity left over from the previous economic downturn, gradual recovery is driven by investment growth, gradually coming into play. Continuous technological progress, investment accumulation, and labor adjustments prepare the supply side for economic recovery. Continuous population growth, rising consumer demand, expanding domestic and international markets, and the resulting investment demand expansion prepare the demand side for economic recovery. The main task of the recovery phase is to utilize idle production capacity, bringing actual production capacity close to or reaching full capacity. Once the original production level is restored, the recovery phase is complete, and a new expansion begins. In the early stages of expansion, central leaders recognize that the opportunity for a construction climax has arrived, calling on the nation to seize the moment, accelerate economic construction, and strive for high-speed growth. Local governments actively respond to the central government's call, vigorously competing for investment projects, expanding investment scale, and increasing investment growth rates. Linked with investment growth, the demand for capital goods (such as raw materials, building materials, machinery and equipment, energy, transportation, etc.) expands rapidly, further driving economic growth. This is followed by high-speed industrial production growth, excessive issuance of money, sharp increases in bank loans, significant increases in government spending, and rapid expansion of consumer funds. During this period, the central government entrusts more power to local governments, including delegating investment approval authority, relaxing loan limits and restrictions, expanding the scope of market mechanisms, granting more preferential policies to local governments, and reducing the proportion of local revenue remitted to the central government. Local governments, on the other hand, "each show their unique skills." The country witnesses a scene of vigorous and enthusiastic economic leapfrogging. The media also plays a role in amplifying this momentum, creating a widespread perception that "the situation is getting better and better."
2. Economic Prosperity or High Boom
The prosperity phase refers to a period of temporarily high-speed economic growth. The actual growth rate exceeds the growth trend and approaches the upper limit of potential production capacity. Economic expansion is not unlimited or arbitrary; it is inevitably constrained by resource supply (e.g., capital, energy, raw material supply) and growth bottlenecks (e.g., transportation, communication bottlenecks). In the face of resource constraints and growth bottlenecks, leaders have two possible choices:
- Slow down economic growth appropriately, suppress rapid expansion of aggregate demand, adopt a mild contractionary policy, and implement counter-cyclical measures. However, making this choice is relatively difficult for central leaders, as it undoubtedly cools down the "heated-up" positive situation, dampens the enthusiasm of cadres and masses, and may also face opposition from local officials. They often tend to choose another approach: further liberating the mind, using various non-economic means to break through resource constraints and accelerate economic growth. This includes: launching mass movements, advocating leapfrogging, opposing conservative ideas and rightist opportunism, mobilizing new non-economic elements of resources (referring to the enthusiasm of the masses), revising annual or five-year plans, significantly increasing output or production targets, reallocating resources, overissuing money, exceeding loan scales, borrowing large amounts of domestic and foreign debt, increasing government borrowing from banks, expanding the proportion of resources available for distribution. The four forces—central leaders' eagerness for quick success, local governments' eagerness to outperform, manufacturers' eagerness for speed, and hundreds of millions of citizens' eagerness for wealth—converge with a common goal, jointly pushing the entire economy to an extreme peak. At this point, China's economy is like a runaway train with its brakes failing; there is no way to slow down or stop it unless a drastic economic adjustment occurs. At this stage, central leaders and economists have differing opinions on whether economic growth is "overheating," facing debates and choices about whether to adjust, when to adjust, small adjustments or large adjustments, "soft braking" or "hard braking," leading to profound divisions and intense debates.
3. Economic Adjustment or Contraction
Large economic fluctuations inevitably lead to large economic downturns, an outcome independent of subjective will. Each significant economic fluctuation has caused severe economic crises: agricultural output decline, stagnation or even decrease in grain production, making the "food" issue particularly prominent; aggregate demand exceeding aggregate supply, excessive fixed-asset investment, oversized investment scale, and exceeding national capacity; continuous overissuance of money, high inflation rates, directly harming the interests of low- and middle-income groups, causing widespread public dissatisfaction; years of massive fiscal deficits, trapping the government in a fiscal crisis; severe imbalances in major economic ratios, insufficient energy and power supply, extremely tight transportation, and shortages of electricity, coal, and materials (referring to raw materials) leading to insufficient production capacity and idle facilities; continuously rising production costs, large accumulations of unsold goods, and declining economic efficiency; sharp increases in imports and deteriorating international. "The key to solving the problem lies in addressing the root cause." The central government is both the engine of economic fluctuations and the stabilizer of economic growth. Whenever the following conditions arise, the central government is forced to implement major economic adjustments:
- Total household consumption exceeds agricultural support capacity, infrastructure scale exceeds social supply capacity, inflation exceeds public tolerance, credit scale exceeds bank payment capacity, and local blind actions exceed central government control capacity. The central government then convenes emergency meetings (e.g., central plenary sessions, central work conferences, or provincial governor meetings), issues a series of central government documents, decides on economic adjustments, and officially makes them the central government's economic construction policy for a certain period. At this point, the goals of the central government and local governments, manufacturers, and the public become inconsistent, especially the sharp conflict between the central and local governments: the former insists on economic adjustment, while the latter continues to pursue expansion; the former insists on stability, while the latter continues to exacerbate fluctuations. In the end, the central government is forced to adopt "" or administrative measures to implement economic adjustments nationwide. The central government adopts nearly identical economic contraction policies and adjustment measures: vigorously compressing fixed-asset investment scale, controlling money issuance and credit scale, cutting government spending, controlling group purchases, increasing agricultural investment, and promoting agricultural growth. At the same time, the central government, emphasizing that local governments must obey the central government, strengthening administrative intervention, conducting widespread financial and economic discipline inspections, increasing the proportion of central government revenue, urging people to tighten their belts or live frugally for a few years, and publicly or internally taking responsibility for economic policy errors to ensure such mistakes are not repeated. Once investment scale is cut, the economic growth rate and industrial output value growth rate decline, falling below production capacity levels; numerous enterprises shut down or halt production, entering the economic trough phase. At this stage, due to inertia, the inflation rate continues to rise; inter-enterprise debt crises begin to, and quickly form a "debt chain."
4. Economic Recession or Low Trough
During this period, economic development suffers severe recession, with the economic growth rate and industrial output value growth rate falling far below the growth trend, even turning negative, with large amounts of production equipment idle. Energy and materials shortages further exacerbate the situation.
Chapter Contents
Introduction
1. Problem Statement
2. Background
3. Basic Views
Chapter 2: Concepts and Nature of Economic Cycle Fluctuations
1. Process of Economic Growth Fluctuations
2. Concept of the Business Cycle
3. Amplitude and Coefficient of Economic Fluctuations
4. Economic Growth and Economic Fluctuations
5. Cyclical Fluctuation Components
6. Actual Real GNP vs. Natural Real GNP
7. Growth Rate—Inflation Rate Matrix
8. Reasonable Range of Economic Growth Rates
9. Summary
Chapter 3: China's Economic Cycle Fluctuations
1. Characteristics of China's Economic Cycle
2. International Comparisons of Economic Growth and Fluctuations
3. Decomposition of Economic Fluctuations
4. Local Economic Fluctuations vs. National Economic Fluctuations
5. Characteristics of 10 Major Economic Variable Fluctuations
6. Economic Operation Status and Dynamic Trajectory
7. Impact of Economic Fluctuations on Economic Growth Rates
8. Examples of Economic Fluctuations
9. Process of Economic Fluctuations
10. Summary
Chapter 4: Mechanism of Economic Fluctuation Formation
1. Literature Review
2. Analytical Framework
3. Internal Transmission Model
4. External Shock Model
5. Constraints on Economic Fluctuations and Growth
6. Summary
Chapter 5: Agricultural Fluctuations and Economic Fluctuations
1. Do Agricultural Fluctuations Affect Economic Fluctuations?
2. Agricultural Fluctuations as the Foundation of Economic Fluctuations
3. Characteristics of Agricultural Fluctuation Impact
4. Weather Cycles and Agricultural Fluctuations
5. Price Fluctuations and Agricultural Fluctuations
6. Comprehensive Analysis of Factors Affecting Grain Growth Fluctuations
7. Summary
Chapter 6: Policy Cycles and Economic Fluctuations
1. Does China Exist in a "Policy Cycle"?
2. Roots of Economic Fluctuations
3. Goals and Content of Economic Expansion Policies
4. Goals and Content of Economic Contraction Policies
5. Reasons for Policy Reversals
6. Why Are Leaders Always Eager for Quick Success?
7. Summary
Chapter 7: Price Fluctuations
1. Mathematical Model of Price Level Changes
2. Characteristics of Price Fluctuations
3. Inflation Since the Reform
4. Dynamic Characteristics of Economic Growth and Inflation
5. Summary
Chapter 8: Monetary and Credit Fluctuations
1. Changes in Financial Structure in China's Economy
2. Characteristics of Monetary and Credit Fluctuations
3. Relationship Between Monetary/Credit Fluctuations and Economic Fluctuations
4. Dynamic Analysis of Monetary, Price, and Economic Fluctuations
5. Summary
Chapter 9: Investment and Consumption Fluctuations
1. Multiplier Principle and Accelerator Principle
2. Characteristics of Investment and Consumption Fluctuations
3. Dynamic Analysis of Variable Fluctuations
4. Summary
Chapter 10: Commodity Market Fluctuations
1. Characteristics of Commodity Market Fluctuations
2. Interactions Between Consumer Goods and Production Materials Markets
3. Investment Fluctuations and Commodity Market Fluctuations
4. Changes in National Income Distribution Structure and Consumer Goods Market Fluctuations
5. Impact of Economic Fluctuations on Market Fluctuations
6. Dynamic Analysis of Economic, Price, and Consumer Goods Market Fluctuations
7. Summary
Chapter 11: Market-Oriented Reform and Economic Fluctuations
1. Four Expansions and Three Contractions of Economic Growth During the Transition Period (1977–1993)
2. Marketization Index: A New Analytical Tool
3. Impact of the Marketization Index on GNP Growth
4. Impact of the Marketization Index Change Rate on Economic Fluctuations
5. Impact of Market-Oriented Reform on Price Increases
6. Summary
Chapter 12: Macroeconomic Stabilization Goals and Policies
1. Economic Growth and Economic Stability
2. Necessity of Macroeconomic Stabilization During the Transition Period
3. Macroeconomic Stabilization Goals
English References
Postscript