The Shape of China’s Recovery

Having brought COVID-19 under control much faster than most other countries, and having implemented stimulus measures informed by the lessons and mistakes of the 2008 crisis, China is now on the road to recovery. But with serious risks on the horizon, it is not out of the woods yet.

BEIJING – China’s economy is on the road to recovery after the COVID-19 shock in the spring of 2020. Negative growth rates in investment, manufacturing activity, and consumption have reversed course and moved into positive territory, and some indicators, such as exports, have even beaten expectations, registering a positive growth rate of more than 10% in the third quarter of the year.

How an economy recovers from an economic shock determines how robust its recovery will be. Back in 2009, the Chinese government’s CN¥4 trillion ($605 billion) stimulus plan following the global financial crisis fueled a credit boom, which inflated the shadow-banking sector and sent debt levels soaring to alarming heights.

To be sure, China’s overall response salvaged the economy and maintained impressive growth rates. But as investment flooded into infrastructure projects and housing, and onto the balance sheets of large state-owned enterprises, it created even more economic distortions than there had been before the crisis. Overall productivity growth would remain diminished for the next decade.

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